India’s Growth Outlook Softens: ADB Revises Forecasts

The Asian Development Bank (ADB) on September 30, 2025, lowered its growth projections for India, estimating real GDP expansion of 6.5% in FY26 (2025–26) and FY27 (2026–27). While the FY26 forecast remains unchanged from July, when ADB cut a more optimistic April projection of 7% to 6.5% due to global headwinds, the FY27 estimate has been trimmed from 6.7% to 6.5%, reflecting increasing caution over external risks.

Q1 Performance Cushions Outlook

India posted a strong 7.8% growth in Q1 FY26, providing some buffer against challenges. Nevertheless, ADB highlighted that recent U.S. tariffs—50% on a wide range of Indian goods and 25% on Russian crude-related imports—will weigh heavily, particularly in the second half of FY26 and into FY27.

Despite the headwinds, ADB maintains a cautiously optimistic stance, citing resilient domestic demand, moderate U.S. exposure, and strong service exports as mitigating factors. Across developing Asia, growth projections have also been downgraded amid trade friction, low external demand, and policy uncertainty.

External Headwinds: Tariffs and Trade Friction

The primary factor behind the downward revision is the steep tariffs imposed by the Trump administration in August 2025. Roughly 60% of India’s exports to the U.S.—including garments, jewellery, leather, and chemicals—are affected. Net exports are expected to drag more heavily on growth than previously assumed.

Moody’s Analytics also revised India’s 2025 growth down by 0.3 percentage points due to these trade shocks. Finance Secretary Ajay Seth estimates the direct impact of tariffs at 0.2–0.5 percentage points of GDP growth.

Domestic Resilience: Consumption, Services, and Policy Support

ADB noted several strengths in the Indian economy:

• Consumption: Strong, fueled by GST and income tax cuts, fiscal support, and rural demand.
• Services: IT, business services, digital exports, tourism, and domestic demand remain robust.
• Agriculture: Expected gains from good monsoons and government support.
• Infrastructure & Housing: Government investment anticipated to rise, especially in later FY26.

Inflation is forecast to ease to 3.1% in FY26, creating room for accommodative monetary policy.

Expert Insights

Albert Park, ADB Chief Economist:
India’s 6.5% forecast is “robust” despite tariffs. U.S.-targeted exports are only ~1.2% of GDP, limiting the direct drag. He recommends diplomatic engagement with the U.S., domestic trade reforms, and temporary assistance for affected sectors.

Indian Government & RBI Views:

• FM Nirmala Sitharaman: Confident of India managing external shocks, targeting 8% growth.
• CEA V. Anantha Nageswaran: Projects 6.3–6.8% growth, calling tariff effects short-term.
• RBI Governor Sanjay Malhotra: Tariff pressures will hit in H2 FY26, but fundamentals are strong.

Industry lobbies urge temporary relief for sectors like textiles, gems, and leather to prevent layoffs or shutdowns.

FAQs

Q1. Why didn’t ADB cut FY26 further?
Strong Q1 growth and resilient domestic demand cushion the economy; tariff shocks are expected later in the year.

Q2. How severe is the tariff impact?
About 60% of U.S.-bound exports face 50% tariffs, affecting key sectors.

Q3. Will manufacturing ambitions suffer?
High-value manufacturing exports may be hampered, with Moody’s estimating a 0.3 percentage point growth reduction.

Q4. Can India renegotiate or retaliate?
Diplomatic channels are active, with pressure on the U.S. to moderate tariffs. Retaliation is politically complex.

Q5. Policy tools to counter the shock?
Options include fiscal incentives for affected sectors, infrastructure spending, trade diversification, and accelerated reforms.

Conclusion

ADB’s 6.5% growth projections for FY26 and FY27 reflect a careful balancing act: acknowledging external risks while relying on India’s domestic resilience. The U.S. tariff shock is significant but back-loaded, allowing time for policy responses.

India’s growth trajectory will depend on rapid mitigation measures—diplomatic engagement, fiscal support, infrastructure investment, and trade diversification. If these measures succeed, India could sustain momentum despite global volatility; if not, growth may slip below the 6.5% mark.