India’s economy is expected to grow at 6.5% in FY26, supported by lower crude oil prices that are likely to ease inflationary pressures and drive domestic growth despite rising global trade tensions, according to EY’s latest Economy Watch report. The April edition of the report outlines four key factors influencing India’s growth prospects: reduced exports, a global slowdown, falling crude prices, and the impact of global excess production capacities.

EY notes that while exports may slow due to higher tariffs and weakening global demand, the effect on GDP could be limited, given the relatively subdued role of net exports in India’s recent growth pattern. Despite the global slowdown, India’s strong fiscal position and monetary flexibility are expected to allow for calibrated economic stimulus. However, the report warns that excess production capacities in major exporting countries could increase dumping risks, necessitating targeted anti-dumping measures.

Crude oil prices, which fell from $75 per barrel in early April to $65 by mid-month and are expected to stay between $60–65 in FY26, are projected to further support domestic growth and curb inflation. EY suggests that India could improve its trade balance by diversifying crude imports toward the US, thereby also lowering its reciprocal tariff rates.

For the medium to long term, EY recommends accelerating land and labour reforms, investing heavily in education, skilling, and emerging technologies like AI and GenAI, and expanding the Production Linked Incentive (PLI) scheme coverage. Strengthening trade ties with the UK, the EU, and select regional partners is also emphasised as part of India's external sector realignment strategy.

EY’s FY26 growth projections align with global agencies’ estimates, falling within the 6.2–6.7% range. The economy is estimated to have grown at 6.5% in FY25. The IMF and World Bank forecast India’s FY26 growth at 6.2% and 6.3%, respectively, while the RBI and S&P Global Ratings expect it to be 6.5%. The OECD and Fitch Ratings project GDP expansion at 6.4%, amid ongoing tariff wars and uncertainties surrounding US trade policy.

Trade tensions escalated after US President Donald Trump announced reciprocal tariffs on April 2, matching duties imposed by other countries on US imports. Though the US administration later paused most tariff implementations for 90 days, it maintained a 10% universal tariff rate and sharply raised tariffs on Chinese goods — first to 145% on April 9, and then to 245% on April 16 — further intensifying global trade challenges.

(Business Standard)