IMF ups India’s forecast to 7 pc, cuts global outlook; fiscal-monetary coordination looks promising, but slow private investment, hidden debt could test it
In a year, when the global economy feels stuck in low gear, India is moving at a different speed.
The International Monetary Fund(IMF)’s latest World Economic Outlook trims worldwide growth to 3.1 per cent for 2026, warning of higher energy costs, geopolitical friction and soft effective demand. Then it turns to India and raises its forecast to roughly 7 per cent growth this fiscal year and the next. The contrast is striking.
What does that growth mean for India, and how does it need to be calibrated so that Indians ‘feel’ it? These are the urgent policy discourses happening in the context of India.
Recovering and growing
While much of the world is managing disappointment, India is still delivering momentum. The latest official numbers make the point concrete.
In the April-June quarter, India’s real GDP expanded 7.8 per cent from a year earlier, accelerating from 6.9 per cent and beating the central bank’s own expectations. Nominal growth hit 10.3 per cent. In real terms, the measure of what the economy actually produces rose 8.2 per cent.
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These figures, released under an updated statistical framework with a 2022-23 base year, show an economy that is not merely recovering but compounding strength.
Methodologically, GDP itself is simply gross value added (GVA) plus net indirect taxes. Net indirect taxes are indirect taxes minus subsidies. If the subsidies remained elevated, it is a reminder that the headline GDP number can sometimes understate the underlying tone of the economy.
Domestically-anchored expansion
Look closer at the drivers and the story becomes clearer. Investment, measured by gross fixed capital formation, surged nearly 12 per cent more than double the previous year’s pace. The government continues to invest in infrastructure — into roads, railways, ports and digital infrastructure, and private companies are beginning to respond.
Higher debt and deficits prevailing in the Indian context are substantiated to a greater extent as they are linked to capital infrastructure investment. Why private corporate investment is still shy is a matter of huge concern, despite pump-priming by the government.
The US Fed is going hawkish, which will have repercussions on interest rates in India and other emerging economies. In that environment, the quiet coordination of fiscal and monetary policy becomes decisive.
Private household spending, still the economy’s largest engine, rose a solid 7.1 per cent. Exports of goods and services jumped 12 per cent while imports softened, giving trade a helpful lift. Services led the production side with a 10 per cent gain, powered by finance, technology and professional work. Manufacturing advanced more than 9 per cent. Agriculture grew more modestly.
This is not a one-sector wonder. It is a broad, domestically anchored expansion — mostly the GDP is public investment-led growth. If harsh fiscal consolidation happens with drastic reduction in public investment, growth suffers.
Delicate balance needed
The world outside remains difficult. The challenges from the external front are more than one. Energy prices have stayed high, which feeds into food and oil inflation through supply-side shocks. Supply chains still carry the imprint of conflict when the consignments get delayed through longer routes by sea via the Cape of Good Hope. Global demand is uneven at best.
The US Federal Reserve is going hawkish, which will have repercussions on interest rates in India and other emerging economies. In that environment, the quiet coordination of fiscal and monetary policy becomes decisive.
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India’s fiscal authorities have chosen gradual fiscal consolidation over sharp fiscal austerity. The fiscal austerity measures have led to a recent upsurge in political movements across the globe.
The Union Finance Ministry met a 4.4 per cent of GDP fiscal deficit target last year and has budgeted a further reduction this year, while protecting and even expanding capital spending. The public debt ratio has edged lower. Still off budget liabilities (hidden debt) is mounting. By investing heavily in productive capacity while restraining the overall fiscal deficit, the government is trying to raise the economy’s long-term speed limit without flooding it with excess demand today.
Fiscal-monetary coordination is key
Monetary policy has moved in parallel. Earlier this month, the Reserve Bank of India (RBI) raised its key interest rate by a quarter point to 5.50 per cent — the first increase in nearly four years — and shifted its stance to “calibrated tightening.” Officials pointed to signs that inflation pressures were beginning to broaden beyond food and fuel.
The message was deliberate: the policy rate cuts are off the table for now; future decisions will depend on the data and could include further modest increases if needed. The central bank is trying to keep inflation expectations in check without slamming the brakes on growth that is still gaining traction.
India’s current performance shows that disciplined public investment and carefully timed monetary vigilance can still deliver results when the world outside is less helpful.
The fiscal and monetary policies reinforce each other. Fiscal policy focuses on infrastructure investments — ports, power plants, digital networks — that make higher growth possible over time. Monetary policy manages the temperature of demand and prices in the present. When external conditions are hostile, this coordination matters.
Public investment can offset weaker export demand and uncertain private confidence. A vigilant but measured central bank can prevent temporary price shocks from hardening into entrenched inflation that would eventually force a sharper slowdown. Together they allow India to run hotter than many peers without overheating.
Road to growth not hurdle-free
None of this, however, guarantees an easy road. Seigniorage financing of deficits is a matter of concern as it leads to fiscal-driven inflation from a money supply surge. So financing of the fiscal deficit cannot be shifted from bond financing.
What is seigniorage financing?
It is a method where a government or central bank finances its budget deficit or public expenditures by printing and issuing new money rather than collecting taxes or borrowing through debt issuance. Source: Investopedia
Also, despite all policy measures, the Indian economy still depends on a good monsoon. A poor monsoon, another oil spike, or a deeper global downturn could still test the economy.
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The high-frequency indicators cannot be relied on to interpret a growth story. However, in the short run, industrial output, bank lending to industry and services, and export shipments all point to continued momentum.
The IMF’s decision to raise its India forecasts while lowering its global ones reflects a growing recognition that domestic engines, especially fiscal and monetary policy coordination, are powerful enough to keep the economy advancing even when the external wind is against it.
The real test
For a nation of 1.4 billion people, growth is never only a statistic. It is the difference between stalled opportunity and expanding possibility, between young workers finding jobs and older ones watching their savings erode.
India’s current performance shows that disciplined public investment and carefully timed monetary vigilance can still deliver results when the world outside is less helpful.
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The test will be whether that discipline holds as the business cycle matures. For now, the empirical evidence says that beyond the upturn of business cycles, unless India pushes structural reforms effectively, there could be ‘permanent scars’ in the downturn of the growth cycles where a magical upturn of growth cannot be possible and sustained.
Beyond a point, fiscal and monetary policies acting as countercyclical policy levers will not work.
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas, or opinions in the articles are of the author and do not necessarily reflect the views of The Federal.)
