US-Iran war impact: IMF lowers India’s GDP growth forecast marginally; still tags it among fastest growing economies
The International Monetary Fund (IMF) on Wednesday marginally lowered the growth projections for India to 6.4% from 6.5% earlier as part of its World Economic Outlook update for the current year. However, it raised the GDP growth projections for the next fiscal year by 0.2% to 6.7%.“India remains among the fastest growing major economies, with growth projected at 6.4 percent, supported by strong momentum in private consumption and services activity,” the IMF report said.It has also marginally lowered its global growth projection for 2026 to 3.0%, cautioning that the outlook continues to be clouded by the conflict in the Middle East, increasing trade fragmentation and the possibility of a reassessment of market expectations surrounding artificial intelligence.Also Read | India’s economy passed the Iran war test. Could El Nino spoil the party?
Impact of US-Iran war
According to the IMF, the global economy has so far avoided a steeper slowdown despite the war, as strong demand linked to the technology sector has helped offset the impact of reduced energy supplies caused by the conflict. The multilateral lender expects global growth to improve to 3.4% in 2027, although that would still remain below the 3.5% average recorded during 2024 and 2025.The IMF left its 2026 growth projection for the United States unchanged at 2.3% while raising its 2027 forecast marginally to 2.2% from 2.1%.For the euro area, the Fund reduced its 2026 growth estimate to 0.9% from the 1.1% projected in April, while keeping the 2027 forecast unchanged at 1.2%.Japan’s 2026 growth forecast was trimmed by 0.1 percentage point to 0.6%, although its projection for 2027 was revised up by the same margin to 0.7%.The outlook for emerging market and developing economies was also revised lower for 2026, with growth now expected at 3.8%, down by 0.1 percentage point. However, the IMF raised its 2027 forecast for these economies by 0.3 percentage point to 4.5%.China received an upward revision, with growth now projected at 4.6% in 2026 compared with the 4.4% forecast issued in April. The 2027 estimate was also raised to 4.1% from 4.0%.The Middle East and Central Asia, the region most severely affected by the conflict, saw the sharpest downward revision. The IMF cut its 2026 growth forecast by 1.2 percentage points to 0.7%, although it significantly raised the region’s 2027 growth estimate by 1.9 percentage points to 6.5%.The IMF also raised its forecast for global headline inflation in 2026 by 0.3 percentage points to 4.7% compared with its April projections, while expecting inflation to ease to 3.9% in 2027. It noted that energy prices are currently about 25% higher than they were before the conflict began on February 28 and are likely to remain elevated.The projections assume that shipping through the Strait of Hormuz will begin normalising from mid-July, with conditions returning to pre-war levels by March 2027.In an update to its World Economic Outlook, the IMF said the global economy has weathered the shock from the war better than initially anticipated. It noted that the outlook has improved for energy-exporting economies and countries with strong links to the technology sector, while commodity-importing nations that are less likely to benefit from advances in artificial intelligence have generally seen their growth forecasts revised lower.The IMF expects global trade growth to slow sharply to 3.5% in 2026 from 5% in 2025, a year when trade was boosted by front-loading ahead of US tariffs. Trade growth is projected to recover to 4.3% in 2027.Deniz Igan, Chief of the World Economic Studies Division in the IMF’s Research Department, said the global economy has demonstrated greater resilience than anticipated in April despite the war and the temporary closure of the Strait of Hormuz. She noted that although energy prices have risen and business confidence has weakened, the release of strategic petroleum reserves, drawdown of commercial inventories and improvements in energy efficiency have helped ease supply shortages. She also said businesses have adapted rapidly by securing alternative supply routes and sourcing options.Speaking to Reuters, Igan cautioned that significant risks remain. She warned that if the peace agreement collapses and hostilities resume, the global economy could face renewed pressure, particularly because many countries have already drawn heavily on their strategic reserves, leaving them with less flexibility to respond to another major supply shock.
Renewed conflict fears
The United States launched a fresh round of military strikes on Iran on Tuesday and simultaneously withdrew the licence that had allowed Tehran to export oil, after three commercial tankers were attacked in the Strait of Hormuz. The developments added fresh strain to an already fragile ceasefire in the region.Deniz Igan of the IMF’s Research Department warned that a renewed conflict would confront the global economy under far more difficult conditions than during the initial phase of the war. She said a simultaneous effort by multiple countries to replenish depleted strategic oil reserves could further fuel a surge in crude prices.“If markets begin to believe the conflict will persist for longer, both the willingness and the ability of countries to draw on their reserves will diminish rapidly,” Igan said.She added that while inflation and inflation expectations have risen following the conflict, the increase has largely been concentrated in the short term, with little evidence so far of a significant shift in medium-term inflation expectations.
