IMF raises India growth forecast for FY26 to 7.3%, warns of AI’s dotcom moment

New Delhi: The International Monetary Fund (IMF) on Monday sharply raised its economic growth forecast for India for the current financial year (FY26) to 7.3% from 6.6% in October, reflecting the better-than-expected outcome since then. The IMF projected in its World Economic Outlook 2026 that India’s growth would then moderate to 6.4% in FY27 and FY28 as cyclical and temporary factors waned.

Inflation in India is expected to return to near target levels after a marked decline in 2025 driven by subdued food prices, the IMF said.

The multilateral agency also upgraded its estimate of global economic growth for calendar years 2025 and 2026 to 3.3%, from 3.2% and 3.1% respectively in October. For 2027, it forecast 3.2% growth. However, it warned that over-optimism about AI, alongside rising trade and geopolitical tensions, could trigger a sharp market crash and disrupt the global economy.

The IMF attributed the steady global growth thus far to a balance of two opposing forces: headwinds from volatile trade policies and tailwinds from a surge in AI and technology investments across North America and Asia. This was further bolstered by supportive fiscal and monetary measures, alongside the adaptability of the private sector in navigating these shifts, it said.

Global headline inflation is expected to decline from an estimated 4.1% in 2025 to 3.8% in 2026 and 3.4% in 2027, suggesting lower energy costs and softer demand. The IMF’s inflation projections are broadly unchanged from those forecast in October.

‘Navigated headwinds deftly’

Experts said the Indian economy has handled external headwinds deftly. “The main message is that all the global supply-chain-related uncertainty and tariff-related issues have not had any significant impact on India’s growth prospects. Estimates by the National Statistics Office at 7.4%, and 7.2% and 7.3% by the World Bank and the IMF indicate that FY26 is going to turn out to be quite good,” said EY India chief policy advisor D.K. Srivastava. There may be some moderation in FY27, in part due to the base effect, he added.

“India’s growth story is intact in spite of global uncertainties. There are no major downside risks to growth as long as we are able to negotiate these global uncertainties and minimise their adverse impact on us,” Srivastava said.

Last week the World Bank projected that the Indian economy would expand 7.2% in FY26 as robust domestic demand reflected strong private consumption, supported by tax reforms and improvements in real household earnings in rural areas. It has projected 6.5% growth for India in FY27.

Experts said India’s strong growth projections for FY26 were the outcome of a carefully sequenced set of fiscal, monetary, and trade reforms that cushioned the economy and laid the foundation for future growth amid slowing global demand and rising trade friction.

“As India enters 2026, several themes will shape the next phase of growth and demand the same level of policy pragmatism. We expect India to grow by 7.5-7.8% this fiscal year followed by 6.6-6.9% in the next,“ said Rumki Majumdar, an economist at Deloitte India.

“There are risks that we will watch out for. US tariff policies and the conclusion of the India-US trade deal will be key in reviving exports and investment even as India diversifies trade exposure. Geopolitical tensions in Central Asia could disrupt commodity prices and key logistics routes, including the Red Sea corridor,” Majumdar added.

“At home, delayed transmission of policy rate cuts to credit growth, resurgence of inflation as demand picks up fast (core inflation has been above 4%), and possible implications of lower tax revenues for fiscal consolidation this year could weigh on the outlook,“ she said.

AI, trade risks

In spite of the global economy’s resilience amid trade tensions, the IMF had a word of caution as risks to the outlook remained tilted to the downside.

“Re-evaluation of productivity growth expectations about AI could lead to a decline in investment and trigger an abrupt financial market correction, spreading from AI-linked companies to other segments and eroding household wealth. Trade tensions could flare up, prolonging uncertainty and weighing more heavily on activity. Domestic political tensions or geopolitical tensions could erupt, introducing new layers of uncertainty and disrupting the global economy through their impact on financial markets, supply chains, and commodity prices,” it warned.

The IMF’s concern is that if expectations of AI-led productivity gains aren’t met, a sharp drop in investments in the high-tech sector and on AI adoption spending, along with a correction in market valuations, could impact private consumption and investment. “Spillovers would spread, directly through trade flows, to export-oriented economies specializing in technology products. These would radiate to the rest of the world through the tightening of global financial conditions. The impact on growth is highly uncertain and depends on how financial conditions react,” the IMF said.

The upside is that AI could significantly improve productivity and boost medium-term growth prospects sooner rather than later. The rapid pace of innovation could foster creative destruction and revive business dynamism, IMF said. “As a result, global growth may be lifted by as much as 0.3 percentage points in 2026 and between 0.1 and 0.8 percentage points per year in the medium term, depending on the speed of adoption and improvements in AI readiness globally,” it said.

Global trade volume growth is expected to decline from 4.1% in calendar year 2025 to 2.6% in 2026 and increase to 3.1% in 2027. These dynamics reflect patterns of front-loading and trade flow adjustments to new policies, the IMF said. It added that over the medium term, expansionary fiscal packages in economies with current account surpluses are expected to contribute to declining global imbalances. Countering this force is the technology-driven business investment surge, which is expected to continue to attract capital flows to the United States.