Informist, Tuesday, Jun. 3, 2025

MUMBAI – The Organisation for Economic Cooperation and Development Tuesday lowered its forecast for India's GDP growth in the current financial year and the next, but maintained private demand will drive the Indian economy amid emerging external headwinds. OECD sees India's GDP growth at 6.3% in 2025-26 (Apr-Mar), 10 basis points lower than its previous forecast, while growth next year is seen at 6.4%, 20 bps less than previously expected.

Government data released Friday showed India's GDP grew higher-than-expected at 7.4% in the quarter ended March, thanks to higher investment, an uptick in construction, and a rise in net taxes. For FY25, India's GDP growth was 6.5%, the lowest in four years.

This is the second consecutive quarterly economic outlook report where OECD has lowered its growth forecast for India. In March, the OECD had cut its FY26 growth forecast for India by 50 bps to 6.4%.

"Private consumption is supported by rising real incomes and lower personal income taxes," OECD said in the report. "Investment will remain strong, bolstered by easing financial conditions. However, export growth is expected to slow due to weaker global demand, the impact of higher tariffs and heightened trade policy uncertainty."

OECD's growth forecast for FY26 is 20 bps lower than the Reserve Bank of India's projection of 6.5% growth. India's finance ministry last month said it expects growth to print closer to 6.8% this year.

OECD projects headline inflation at 4.1% in FY26, and 4.0% in FY27, due to the moderation of food and energy prices. According to the international organisation, inflation expectations in India remain well anchored, while wage pressures are expected to remain contained. Economy projected to grow around its potential suggests there are limited demand-driven inflation pressures, it said.

"With headline inflation expected to remain within the target range (of 2-6% with 4% as the main aim) in the following years and inflation expectations projected to remain anchored, there is scope for the central bank to reduce the policy rate towards a more neutral level," OECD said. It expects another 25 bps rate cut by the end of 2025, after the RBI's Monetary Policy Committee lowered the policy rate by 50 bps since February to 6.00%. OECD, however, does not expect the RBI to lower interest rates beyond 2025 as part of the current easing cycle.

While the inflation outlook remains largely benign, monsoon rains below normal or higher global commodity prices could drive up food prices and inflation, OECD said. A less benign monsoon could also weigh on GDP growth as it would reduce agricultural output and rural incomes, it added.

Another risk to India's growth could come from the global trade situation, including from the imposition of higher US tariffs on imports from India, OECD said. This, OECD said, could dampen external demand and harm export-oriented sectors such as textiles, chemicals, and pharmaceuticals. "Trade tensions may also discourage private investment in tradable sectors. Stronger-than-expected remittances and investment inflows, coupled with robust infrastructure implementation, could lift growth above current projections."

FISCAL MATTERS

India's central government has set a fiscal deficit target of 4.4% of GDP for FY26. Data released Friday showed, the government achieved a fiscal deficit of 4.8% of GDP in FY25.

OECD suggests phasing out tax expenditures, rationalising subsidies, and expanding tax bases. This, it said, would improve the quality and sustainability of public finances, creating room for expanding social protection, higher public investment, and active labour market policies. "Emphasis should be placed on policies that raise labour force participation, especially among women," OECD said.

OECD also said India has scope to accelerate trade liberalisation, simplify customs procedures, and reduce tariffs. "Further reforms are needed to improve the efficiency of logistics networks, upgrade digital infrastructure, and reduce regulatory uncertainty, especially in tax administration," OECD said. End

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

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