The World Bank has revised India's GDP growth forecast for FY26 to 6.5%, up from its earlier projection of 6.3%, citing resilient domestic demand, robust rural recovery, and the positive impact of GST 2.0 reforms. The update underscores India's position as the fastest-growing major economy in the world, driven primarily by strong domestic consumption.
However, the World Bank has issued a cautionary note for FY27, lowering the growth forecast to 6.3%, warning that higher U.S. tariffs could weigh on exports.
"Domestic conditions, particularly agricultural output and rural wage growth, have been better than expected. The government's reforms to the GST, reducing the number of tax brackets and simplifying compliance are expected to support activity," said the World Bank in its South Asia Development Update.
India's Q1 FY26 GDP Growth Exceeds Expectations
India's economy showed strong momentum, with GDP growing 7.8% in the first quarter ending June 30, 2025-well above analysts' expectations of 6.5-7%.
- Q1 FY25: 6.5% growth
- Q4 FY25: 7.4% growth
- Q1 FY26: 7.8% growth
The Ministry of Statistics & Programme Implementation stated that real GDP at constant prices reached Rs 47.89 lakh crore, up from Rs 44.42 lakh crore in Q1 FY25. Nominal GDP, factoring in inflation, grew 8.8% during the same period.
GST 2.0 Reforms to Boost Consumption
GST overhaul, effective September 22, 2025, is expected to stimulate economic activity by simplifying the tax structure:
- Reduced to two main slabs: 5% and 18%
- Special 40% slab for luxury and sin goods
- Household essentials such as hair oil, toothpaste, soaps, and shampoo are now taxed at 5% instead of 18%
- Butter, ghee, cheese, packaged namkeens, utensils, feeding bottles, clinical diapers, and sewing machines moved to the 5% slab
Dubbed a "historic Diwali gift", the reforms aim to lower living costs, boost consumption, and enhance economic growth.
U.S. Tariffs Could Impact Growth Next Year
The World Bank has warned that India's growth could face headwinds in FY27 due to U.S. tariffs on Indian goods.
- Effective August 27, 2025, the U.S. imposed a 50% duty on selected Indian products, following an earlier 25% increase.
- Approximately one-fifth of India's goods exports went to the U.S. in 2024, equivalent to roughly 2% of GDP.
- The tariffs are linked to India's trade relations with Russia, including its purchase of Russian crude oil.
While New Delhi has strongly condemned the tariffs, Moscow has supported India's right to choose its trade partners.
CAclubindia
