The International Monetary Fund report shows that the Indian economy will face significant short-term risks

Recently, the International Monetary Fund (IMF) released a country specific economic assessment report showing that the Indian economy continues to perform well. With the support of improved domestic economic conditions, it is expected that the economy will remain resilient, but it will still face significant short-term risks.

The report states that from fiscal year 2024 to fiscal year 2025, India's economic growth rate is 6.5%. From fiscal year 2025 to the first quarter of fiscal year 2026, India's real Gross Domestic Product (GDP) grew by 7.8% year-on-year. Meanwhile, due to the relatively mild trend of food prices, which provides favorable conditions for curbing inflation, India's overall inflation level has shown a significant decline since the beginning of this year. Supported by sufficient capital buffers and a multi-year low in non-performing asset ratios, the economic resilience of India's financial and corporate sectors has strengthened. The improvement in fiscal and financial stability has also demonstrated resilience in India's service trade exports, providing a positive hedge against the expanding commodity trade deficit.

The report is based on the benchmark assumption that the United States will maintain a high 50% tariff on Indian goods imported to the United States in the long term. It is expected that India's real GDP will grow by 6.6% from fiscal year 2025 to fiscal year 2026; The inflation rate will decrease to 2.8%; The export value of commodity trade will reach 416.3 billion US dollars, a year-on-year decrease of 5.8%; The import volume of commodity trade will reach 746.6 billion US dollars, a year-on-year increase of 2.4%; The external debt will increase to 791 billion US dollars, accounting for 19.2% of GDP. Meanwhile, the report predicts that India's real GDP growth rate will slow down to 6.2% from fiscal year 2026 to 2027; The inflation rate will rebound to 4%; The export value of commodity trade will further decrease to 409.5 billion US dollars, a year-on-year decrease of 1.6%; The import volume of trade will reach 782.6 billion US dollars, a year-on-year increase of 4.8%; The external debt will continue to grow to 856.3 billion US dollars, accounting for 19% of GDP.

The report believes that the comprehensive structural reforms promoted by the Indian government have increased the potential economic growth rate, especially the official implementation of the Goods and Services Tax (GST) on September 22, 2025, which greatly simplifies India's tax rate structure, improves the compliance process of enterprise registration, significantly reduces the actual tax rate, helps stimulate domestic consumption, promote trade growth, alleviate the adverse effects of high tariffs, and control overall inflation.

The report points out that accelerating structural reforms and continuously promoting fiscal consolidation plans are the key to India's reform. In the short term, achieving the fiscal deficit target requires strict fiscal discipline. While simplifying the Goods and Services Tax, it is also necessary to closely monitor the fiscal impact of the reduction of the Goods and Services Tax and personal income tax rates, and improve the pertinence, transparency, and timeliness of tariff reduction measures. In the medium term, it is necessary to increase domestic fiscal revenue to enhance the buffer space of fiscal policy, while taking more targeted measures to improve the efficiency of fiscal expenditure.

Although the report acknowledges India's recent economic performance, it also points out that its economic outlook will still face significant short-term risks. On the one hand, further deepening of geo economic fragmentation may lead to tightened financial conditions, increased input costs, as well as slower trade, foreign direct investment, and economic growth. On the other hand, unpredictable climate change risks may have a significant impact on Indian agriculture, suppressing rural consumption, pushing up agricultural product prices, and thereby re raising inflationary pressures.

The report believes that the Indian government needs to continue to promote financial structural reforms, further improve the interest rate transmission mechanism, and enhance exchange rate flexibility. Non bank financial institutions also need to be cautious in preventing risks, and carefully monitor credit concentration and financial sector related risks.

The report points out that comprehensive structural reforms are crucial to supporting sustained economic growth in India. Firstly, the Indian government needs to further strengthen human capital accumulation, increase female labor force participation rate, continue to promote public investment, and optimize the business environment; Secondly, we should deepen domestic market and trade integration to enhance economic competitiveness and improve market conditions to attract more foreign direct investment; Again, we should increase research and development investment and cultivate innovation capabilities, promote green economic transformation, and expand preferential financing channels to provide solid guarantees for achieving sustainable economic growth.