Impact of U.S. Tariffs on India's Economic Growth Forecast

The World Bank has revised its economic growth projections for India and South Asia, primarily due to the imposition of higher tariffs by the United States on Indian exports. In its latest report, the World Bank raised India's growth forecast for the fiscal year 2025-26 (FY26) to 6.5%, up from 6.3% previously estimated. However, it has downgraded the growth projection for FY26-27 to 6.3%, citing the adverse effects of a 50% tariff on nearly three-quarters of Indian goods exported to the U.S. This tariff impacts approximately $50 billion worth of exports, particularly affecting labor-intensive sectors such as textiles, gems, and seafood.

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The World Bank's report indicates that India's economy has shown resilience, with a growth rate of 7.8% in the April-June quarter of 2025, driven by strong domestic consumption and public investment. The report highlights that nearly one-fifth of India's goods exports were directed to the U.S. in 2024, accounting for about 2% of the country's GDP. Despite the tariff challenges, India is expected to remain the fastest-growing major economy, supported by robust agricultural output and rising rural wages.

World Bank ups India’s FY26 growth forecast, but cuts FY27 hopes on US tariffsThe HinduWorld Bank Raises India’s FY2025/26 Growth Forecast to 6.5%The Statesman

The broader South Asian region, which includes India, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives, is projected to experience a slowdown in growth. The World Bank forecasts that South Asia's growth will decline from 6.6% in 2025 to 5.8% in 2026, marking the lowest growth rate in 25 years, excluding periods of global recession. This decline is attributed to the negative effects of U.S. tariffs on Indian exports, which significantly influence the region's economic performance, given that India constitutes nearly 70% of South Asia's total economic output.

US tariffs could drag down South Asia growth rateWorld Bank raises India’s FY26 growth forecast to 6.5%, cites tariff risks aheadCityLabWorld Bank ups India’s FY26 growth forecast, but cuts FY27 hopes on US tariffs

Franziska Ohnsorge, the World Bank's chief economist for South Asia, noted that while India is better insulated than other emerging markets, it is not immune to the impacts of global economic shifts and trade policy changes. She emphasized that the tariffs have turned out to be higher than initially anticipated, necessitating a revision of growth projections. The Indian government has responded to these challenges by implementing tax cuts across various sectors to mitigate the impact of tariffs.

World Bank ups India’s FY26 growth forecast, but cuts FY27 hopes on US tariffs

Critics argue that the high tariffs imposed by the U.S. not only threaten India's export-driven sectors but also hinder overall economic growth in South Asia. The tariffs are seen as a protective measure that could lead to increased costs for consumers and reduced competitiveness for Indian manufacturers. Additionally, concerns have been raised about the potential long-term effects of these tariffs on job creation and economic stability in the region.

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Looking ahead, the World Bank suggests that India must continue to pursue reforms to enhance trade openness and adapt to technological advancements, particularly in artificial intelligence (AI). These measures are deemed essential for sustaining economic growth and addressing the challenges posed by global trade dynamics. The World Bank's ongoing assessments will likely influence future policy decisions and economic strategies in India and the broader South Asian region.

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