IMF's World Economic Outlook: India may fare better than the world but that’s no reason to celebrate

At 6.5%, India’s projected GDP growth for 2026-27 is 0.1 percentage point higher than published in the January World Economic Outlook of the IMF and 0.3 percentage point higher than its October view. Even though modest, this upshift underscores an economic momentum reckoned to be less exposed to war shocks than the world’s pace of expansion.

The global economy is seen growing 3.1% in 2026, down from 3.3% predicted in January. “We were planning to upgrade growth for 2026 to 3.4%” before the war intervened, IMF chief economist Pierre-Olivier Gourinchas reportedly said.

Clearly, the war has upset the IMF’s calculations. If that markdown does not look drastic, it is because its view assumes a short-lived conflict. If hostilities persist, global growth could dip to 2.5%, possibly even to 2% in the event of prolonged energy disruptions. That would feel recessionary. Together with a surge in inflation to 6%, it would spell stagflation.

For now, global inflation in 2026 is placed at 4.4%, up from 3.8% projected earlier.

As the world faces a range of risks, economies could be hit by the war through a maze of effects. Three channels are the least escapable.

First, as a supply shock sets in, energy-intensive goods and services—fertilizers, chemicals, food, transport, heating, etc—will get dearer. This will feed inflation and weaken purchasing power.

Second, should this prompt workers to demand higher pay and make firms hike prices, it could set off an upward spiral that would compel a tighter-money policy, even if making credit costlier hurts GDP growth.

Finally, if macro instability triggers risk-off attitudes in financial markets, we could see asset valuations get impaired, risk premiums rise and perhaps even capital flight to safe havens, all of which would dampen demand.

In such a downbeat scenario, what makes India stand out? For one, trade talks with America have resulted in US tariffs dropping to 10% from 50%. As the IMF sees it, this gain should help offset the war’s impact.

Although the US judiciary has turfed out some tariffs, India is under a US probe for potential new ones and a bilateral deal is yet to be signed, our position has clearly improved on this front. The IMF also found that India’s growth has beaten expectations since mid-2025. Momentum matters.

India’s resilience is reassuring. But these are also times of uncertainty, which means that key events defy probability estimates. As it happens, a few conventional measures have taken a bleak turn lately.

Private investment has long been weak and our demand recovery from the covid pandemic uneven, but foreign investment is a recent let-down; inflows threaten to dry up just as our growth thrust needs all the capital it can get.

The rupee has been in unusual distress. And we now have dismal rainfall forecasts that portend a flare-up in food prices later this year.

The government has been in crisis-response mode, thankfully, but may need to extend its vigil to supply conditions across sectors, even as it keeps diplomacy deployed to tackle import disruptions. If the US and Iran fail to make peace, we would have to think beyond stopgap measures. Either way, the agility of New Delhi’s policy response would make a difference.