India must accelerate reforms to reach advanced-economy ambition, IMF says

India’s economic outlook remains strong, but the country’s ambition to move toward advanced-economy status will depend on a deeper round of structural reforms, the International Monetary Fund (IMF) said on Wednesday after concluding its annual Article IV review.

The Article IV exercise is the IMF’s yearly health-check of member economies, assessing growth, inflation, financial stability and the strength of policy frameworks.

The IMF said India continued to deliver “very strong economic performance,” pointing to growth of 6.5% in fiscal 2025 and a growth of 7.8% in the first quarter of fiscal 2026.

Headline inflation has eased as food prices softened, while banks and corporates remain resilient with healthy capital buffers and low non-performing assets.

The Fund noted that growth should stay robust despite external headwinds. Under the assumption that the recently introduced 50% US tariff regime remains in place, the IMF projects gross domestic product (GDP) growth of 6.6% in fiscal 2026 and 6.2% in the next fiscal.

The recent reduction in goods and services tax (GST) and personal income tax rates is expected to offset some of the tariff impact by lifting domestic demand and lowering near-term inflation.

The IMF warned, however, that India’s medium-term ambitions require reforms that lift productivity and broaden economic participation.

The Executive Board said accelerated implementation of structural reforms “will be critical” for India to sustain stability and support its goal of becoming an advanced economy.

It called for stronger investment in human capital, higher female labor-force participation, improvements in the business environment, deeper trade integration, and greater support for research and innovation to raise long-term potential growth.

The Fund also flagged significant near-term risks. Greater geoeconomic fragmentation could raise input costs, tighten financial conditions and weaken trade and investment flows.

Weather shocks could hurt crop output, strain rural incomes and reignite food-driven inflation. On the upside, new trade agreements and faster domestic reforms could support stronger exports, private investment and employment.

On fiscal policy, the IMF backed the government’s ongoing consolidation efforts but said meeting the fiscal 2026 deficit target will require “strong spending discipline.”

Directors welcomed the recent GST simplification but urged close monitoring of its fiscal impact. They said tariff relief should be targeted and timebound, and encouraged India to re-examine its medium-term debt target in light of next year’s GDP rebasing.

The Fund added that fiscal buffers should be rebuilt over time through better revenue mobilization and more efficient expenditure, including more targeted social-safety nets. It also stressed the importance of strengthening state-level finances and monitoring contingent liabilities.

On monetary policy, the IMF supported the Reserve Bank of India’s data-dependent stance and said that if tariffs persist at current levels, “there would likely be scope for further monetary easing” as long as inflation remains benign.

It also urged continued efforts to improve monetary transmission and recommended greater exchange-rate flexibility to help absorb external shocks, with interventions limited to addressing disorderly market conditions.

The IMF said India’s financial system remains sound but called for vigilance toward risks in non-bank financial institutions and rising interconnectedness across the sector. It encouraged further progress on regulatory reforms, including recommendations from the 2024 Financial Sector Assessment Program and the Financial Action Task Force.

The review noted that India’s external position has been supported by resilient service exports and a contained current-account deficit. Foreign-exchange reserves are projected to rise from $668 billion in FY25 to about $710 billion by end-FY26.

Looking ahead, the Fund said India’s development trajectory will depend on its ability to combine investment in people, deeper global integration and a stronger innovation ecosystem with continued macroeconomic stability. It added that improvements in data quality would also support better policymaking as the economy grows in size and complexity.