ADB lowers India's economic growth projection to 6.5% in FY26 on tariff concerns

The Asian Development Bank (ADB) has lowered India’s gross domestic product (GDP) projections for the current financial year to 6.5% from earlier estimates of 6.7%, majorly due to tariffs concerns.

"While the FY2025 forecast remains unchanged from ADB’s July 2025 projection, the FY2026 estimate has been revised downward from 6.7% to 6.5%," ADB said in a release today.

"This adjustment reflects anticipated headwinds from newly imposed US tariffs on Indian exports. However, resilient domestic consumption and strong performance in service exports are expected to cushion the impact of these trade barriers," it added.

“Despite ongoing trade challenges, we remain optimistic about India’s long-term growth trajectory,” said Mio Oka, country director for India, ADB.

 “The implementation of tariffs will weigh on growth, but the overall impact on GDP is expected to be contained due to India’s relatively lower exposure to the US market, increased exports to alternative markets, sustained strength in services exports, and a pickup in domestic demand," he added.

"Recent policy steps—including reductions in GST rates, cuts in personal income tax, and employment-linked fiscal incentives for both workers and firms—are poised to boost consumption across rural and urban regions and reinforce economic momentum," ADB said in report - Asian Development Outlook, September 2025.

It said services will continue to be the major driver of growth in FY2025 and FY2026 helped by higher demand for domestic consumption and export, while agriculture growth will be strong due to favorable monsoon rainfall. 

"Investment growth is likely to stay muted in FY2025 amid global trade uncertainties, though government spending on urban infrastructure, especially via the urban challenge fund, is set to pick up in FY2026. Manufacturing will continue to face pressure from trade barriers dampening industrial growth, though housing construction will continue to remain robust," it added.

Inflation is projected to ease to 3.1% in FY2025 but may rise towards the inflation target in the following year, according to ADB.  With monetary policy authorities undertaking significant rate cuts already, there may be slower rate cuts going forward, it cautioned. 

The report highlights several near-term risks, including escalating trade tensions that could impact broader sectors of the economy, global geopolitical uncertainties that may dampen demand for India’s exports, and domestic disruptions stemming from ongoing flood-related shocks," a release from ADB said.

"However, on the upside, growth could be spurred if US tariffs on India are lowered to be more in line with those imposed on other countries in Asia and the Pacific," it added.