India's economic growth is projected to reach 7.4% in FY26, driven by the effects of Goods and Services Tax (GST) reforms and a potential boost from the US economy. This forecast, made by the National Institute of Public Finance and Policy (NIPFP), is more optimistic than the Reserve Bank of India's (RBI) estimate of 6.8%.

GST Reforms as a Catalyst

The rationalization of GST rates is expected to be a key factor in propelling India's GDP growth. The implementation of GST 2.0, which includes lower rates and a simplified tax structure, is anticipated to boost demand across various sectors by reducing prices and making goods more affordable. MSMEs (Micro, Small, and Medium Enterprises) are particularly likely to benefit from lower compliance costs, improved working capital flows, and enhanced competitiveness in the global market. Hardeep Singh Puri, Union Minister for Petroleum and Natural Gas, has stated that GST reforms could potentially increase India's GDP by 0.8%.

Demand Revival and Consumption Boom

The anticipated revival in domestic demand and a corresponding consumption boom are also expected to contribute significantly to economic expansion in FY26. Several factors are expected to drive this consumption-led growth. Cuts in income tax rates will increase disposable income, fueling greater spending. Additionally, a favorable monsoon season and easing inflation are projected to boost household income and reduce borrowing costs, further stimulating consumption.

V. Anantha Nageswaran, Chief Economic Advisor (CEA), has expressed confidence that India's economic growth in FY26 will surpass 6.8%, attributing this to increased consumption resulting from GST rate cuts and income tax relief.

Global Factors and Trade

The performance of the US economy is another factor influencing NIPFP's growth projection. A potential resolution on the trade front between the US and India could provide an additional boost to growth. However, rising US tariffs on Indian imports pose a risk to the trade outlook. The IMF has also noted that higher US tariffs and increasing protectionism could reduce demand for Asian exports, potentially weighing on growth in the near term.

Other Expert Views and Forecasts

• The International Monetary Fund (IMF) has raised India's FY26 GDP growth forecast to 6.6%, citing a strong performance in the first half of the year and the impact of GST reforms.
• The World Bank has upgraded India's FY26 GDP forecast to 6.5%.
• EY has increased India's real GDP growth prediction for FY26 to 6.7%, citing robust first-quarter performance and demand resurgence following recent GST changes.
• S&P Global expects India's GDP growth to hold steady at 6.5% in FY26, supported by strong domestic demand and tax reforms.

Potential Challenges and Considerations

While the outlook for India's economic growth in FY26 appears positive, there are potential challenges to consider. A sudden rise in food or fuel prices could undermine inflation relief. Fiscal pressures arising from tax concessions need careful management. Uncertainties related to external trade and global headwinds could also impact growth. Despite these challenges, the Indian economy has demonstrated resilience. Domestic structural reforms are helping to offset the impact of weakening external demand. The government's commitment to public investment and infrastructure development is expected to further support economic expansion.