Don’t celebrate the IMF's outlook just yet: How resilient is India’s growth story in a fractured world?

However, as IMF Managing Director Kristalina Georgieva said, India’s economy remains a bright spot in an uncertain global environment, with growth running at more than twice the global average, supported by strong underlying fundamentals.

India entered this year with a rare advantage. With GDP growth of 7.6% in 2025-26, it, outpaced every other major economy. This may look reassuring, but its story is one of exposure too, not just insulation. Growth would be harder to achieve from here on.

In the absence of a war in West Asia, India would have expected resilience to keep its economy on a steady path in 2026-27 and 2027-28. The IMF attributes India’s positive growth outlook to its 2025-26 momentum, policy support and a decline in US tariffs on Indian goods from 50% to 10% that offsets external shocks. The IMF’s growth projection remains at 6.5% for 2026-27 and 2027-28, with moderate disruption.

However, this resilience could be largely driven by a momentum that would reveal fragility if it ebbs away. Near-term prospects have worsened due to disruptions caused by the war’s closure of the Strait of Hormuz. Medium-term prospects remain constrained by structural challenges. Global growth itself is expected to slow from 3.4% in 2025 to 3.1% in 2026, with trade growth collapsing from 5.1% to 2.8%. This puts the onus for growth on domestic GDP drivers.

The most immediate risk is energy prices. India imports roughly 90% of its oil needs and remains heavily dependent on supplies from West Asia. The IMF projects that, under moderate oil supply disruption, prices will rise by 21.4% in 2026, implying a spot price of $82 per barrel. For India, this is not just inflationary but a serious macroeconomic stress.

High oil import bills widen the current account deficit, which in turn pressures the rupee, amplifying the possibility of imported inflation. Further, it constrains fiscal space, especially if subsidies rise.

The IMF warns that commodity-importing emerging markets, such as India, are hit the hardest, particularly if currency depreciation compounds price shocks.

Globally, inflation is projected to rise from 4.1% in 2025 to 4.4% in 2026, driven by energy and food shocks. India saw inflation ease in 2025 due to subdued food prices, but the IMF expects inflation to return to the 4% level as global pressures build. India’s wholesale inflation was already at 3.9% year-on-year in March, up from 2.1% in February, driven by higher prices of crude, power and manufactured goods amid the war.

This is expected to worsen. Natural gas prices could stay high for longer, given the technical complexity of restarting production and low reserves to fall back on. Food prices may be pushed up by higher energy and fertilizer costs.

The IMF noted a striking reorientation of global trade. US imports are shifting away from China towards other economies, such as Vietnam and, to a lesser extent, India. This supply chain diversification offers India an opportunity.

India’s export profile adds another layer to this story. It is far more service-oriented than most large economies. This matters because global trade itself is shifting in that direction.

Over the past four decades, trade in services has grown much faster than trade in goods. Between 1985 and 2024, services exports as a share of world GDP rose by about 150%, while merchandise exports grew by roughly 60%, although the latter still dominate, accounting for over 70% of overall trade. But as structural forces push services to the front, India could gain.

The IMF has also pointed to a shift in global finance. Markets are becoming more risk-averse, financial conditions are tightening and bond yields are rising. Capital flows are turning more selective and volatile.

For India, this remains one of the most underestimated risks. As global risk appetite weakens, the economy faces the likelihood of higher borrowing costs, persistent capital outflows and renewed pressure on the currency.

Foreign investors have already sold about $38 billion of Indian equities since the start of 2025, including a record $12.7 billion in March alone, an unusually large outflow.

The rupee had begun depreciating and the 10-year G-Sec yield was elevated even before the war. That said, India enters this phase with stronger buffers than in the past. Foreign exchange reserves are high and macroeconomic policy credibility has improved.

However, insulation should not be mistaken for immunity. In a risk-off world, even relatively strong economies can come under strain.

India’s 6.5% growth projection for this fiscal year under moderate disruption is impressive but presents a paradox. It is the fastest-growing major economy, yet remains deeply exposed to global shocks.

The current phase of growth is supported by supply chain shifts, domestic demand and improved policy credibility. Nonetheless, these strengths coexist with persistent vulnerabilities, so a moderate-to-severe energy shock could destabilize our macroeconomic balances.

The IMF’s observation is clear: resilience has held India’s economy up so far, but risks are rising and unevenly distributed. Therefore, India’s challenge is no longer faster growth but sustaining it in a world where the rules themselves are changing.

The author is professor, Madras School of Economics.