Why World Bank slashed India’s growth forecast to 6.3% for FY26?

The World Bank has revised India’s GDP growth forecast downward for the financial year 2025-26, citing external and domestic challenges. This follows a similar move by the International Monetary Fund (IMF), marking a consensus among global financial institutions on a more cautious outlook for India.

India’s Growth Forecast: Revised Estimates and Key Drivers

Growth Slows to 6.3% for FY26

In its latest South Asia Development Update released on Wednesday, the World Bank lowered India’s projected growth rate for FY26 to 6.3%, down by 0.4 percentage points from its previous estimate of 6.7%. This comes after an earlier downward revision for FY25, now expected at 6.5%, down from the previously projected 7.0%.

Global Weakness and Policy Uncertainty at Play

According to the Bank, the downgrade stems from a mix of global economic weakness and domestic policy uncertainty, despite some supportive domestic measures such as monetary easing and regulatory streamlining. These positive measures are expected to be offset by external headwinds, including a slowing global economy and uncertain investment climate.

IMF Echoes Caution: Cuts Growth Outlook for India

Just a day before the World Bank’s update, the IMF also slashed its forecast for India:

• For FY26, the IMF reduced its estimate by 0.3 percentage points, from 6.5% to 6.2%.

• For FY27, it cut the growth estimate from 6.5% to 6.3%.

These figures are also below the Reserve Bank of India’s (RBI) projection of 6.5% for FY26. The RBI had earlier estimated 6.7%, but now sees quarterly growth tapering through the fiscal year:

• Q1: 6.5%
• Q2: 6.7%
• Q3: 6.6%
• Q4: 6.3%

Factors Behind the Slowdown

Sluggish Investment and Underwhelming Public Spending

In FY25, India’s growth was impacted by a slower pace of private investment and public capital expenditure falling short of government targets.

Equity Market Volatility and Consumption Risks

The World Bank also flagged concerns about India’s rapidly expanding equity markets, noting significant — but volatile — foreign inflows.

• India ranked second only to the US in terms of IPO values in 2024.
• A market correction since late 2024 has not yet caused widespread disruption but poses a medium-term risk to private consumption and investment.

Fiscal Policy Balancing Act

The Indian government has embarked on fiscal consolidation, while simultaneously implementing tax cuts to support consumption and regulatory streamlining to spur private investments. However, the benefits of these policies may be neutralized by persistent global economic uncertainties.

India’s Position in the Regional Context

South Asia’s Slowing Momentum

According to the World Bank, overall growth in South Asia is projected to soften to 5.8% in 2025, which is 0.4 percentage points below previous forecasts. However, a slight recovery to 6.1% is expected in 2026.

Debt Pressures Mounting in the Region

Governments in India, Maldives, Pakistan, and Sri Lanka face above-average net interest payments relative to GDP. These countries are projected to run fiscal deficits between 7-17% of GDP in 2025, raising concerns of rising risk premia and potential debt distress.

Country-Specific Growth Outlooks

Bangladesh

• Growth is expected to slow to 3.3% in FY25, attributed to political instability and financial challenges.
• A rebound to 4.9% in FY26 is projected as conditions stabilize.

Bhutan

• Forecast revised down to 6.6% in FY25, due to weak agricultural output.
• Growth seen rising to 7.6% in FY26, driven by hydropower construction.

Pakistan

• Economy projected to grow by 2.7% in FY25 and 3.1% in FY26 amid structural challenges.

Sri Lanka

• A gradual recovery anticipated as the country progresses on debt restructuring.
• Growth to hit 3.5% in 2025, before moderating to 3.1% in 2026, on the back of increased investment and external demand.