US tariff effect: Asian Development Bank trims India’s growth outlook for FY26 and FY27 to 6.5%

New Delhi: Asian Development Bank (ADB) has pared back its growth outlook for India, citing the drag from steep US tariffs imposed in August, the multilateral development agency said in a statement on Tuesday.

The Manila-headquartered organization now expects the Indian economy to expand 6.5% in both fiscal year 2026 (FY26) and FY27, down from its April forecasts of 6.7% and 6.8%, respectively.

“While the FY25 forecast remains unchanged from ADB’s July 2025 projection, the FY26 estimate has been revised downward from 6.7% to 6.5%. This adjustment reflects anticipated headwinds from newly imposed US tariffs on Indian exports,” ADB said. “However, resilient domestic consumption and strong performance in service exports are expected to cushion the impact of these trade barriers,” it added.

The finance ministry expects the Indian economy to grow at 6.3% to 6.8% in FY26, and the government’s chief economic adviser expects growth to be near the upper end of this range, buoyed by sweeping GST cuts.

The Indian economy expanded 7.8% in the first quarter (April-June) of FY26, its fastest pace in five quarters, defying expectations of a slowdown.

In June, the World Bank lowered its FY26 growth forecast for India to 6.3% from 6.7% in January, citing weaker exports and investment. The International Monetary Fund (IMF) now expects India to grow 6.4% in both FY26 and FY27, citing resilient domestic fundamentals and a more benign global environment. Meanwhile, Fitch Ratings has raised its India growth forecast for FY26 to 6.9% from its June estimate of 6.5%, citing stronger-than-expected momentum in services and resilient household and government spending.

Tariffs will hurt, but India has a cushion

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

In August, US President Donald Trump imposed sweeping tariffs on Indian imports, signaling a sharp departure from previous norms. Effective 27 August, the US imposed a 50% tariff on a broad range of Indian goods including textiles, gems, jewelry, leather products, and chemicals, doubling its initial 25% ‘reciprocal tariff’ in response to India’s continued purchases of discounted Russian oil.

Simultaneously, the US introduced a 100% tariff on imported patented pharmaceuticals, unless the manufacturer is actively building a production facility in the US. The Indian government estimates the tariffs could affect up to $48 billion of exports, potentially leading to job losses and slower economic growth.

Services to the rescue

Despite these trade setbacks, ADB expects the Indian government’s recent policy steps including income tax and GST cuts, and the roll-out of employment-linked fiscal incentives for both workers and firms to boost consumption.

ADB expects services to remain India’s main growth driver in FY26 and FY27, supported by robust domestic consumption and export demand. Agriculture is set to benefit from a favourable monsoon, while investment growth may remain subdued amid global trade uncertainties, ADB said.

The agency expects India’s manufacturing sector to face headwinds from trade barriers, even as housing construction remains resilient and government spending on urban infrastructure is expected to pick up in FY26.

ADB projects India’s inflation will ease to 3.1% in FY26, though it expects only gradual reductions in interest rates going forward.