World Bank has given India a bittersweet pill to chew on—the nation will remain the fastest growing major economy in the world, going up to a growth rate of 7.6 per cent in the financial year just ended on March 31, 2026 (FY2025-26), but will plummet down to 6.6 per cent in the financial year that just started (FY 2026-27).
India’s slowed-down growth is mainly due to the expected impact of rising energy costs, thanks to the conflicts in the Middle East. This is expected, no matter how long or short the crisis drags on, to higher inflation (oil prices impacting retail petrol and diesel prices, which in turn cause food prices to go up).
The other factors include the likely lessening of foreign remittances, the money sent by Indian expats working abroad, particularly in the Gulf region. India’s exports to the Middle East, which are rather substantial, could also be another big reason.
Released Thursday afternoon, the World Bank’s India Development Update (done every six months) says that despite significant downside risks stemming from the Iran war, the Indian economy’s strong fundamentals and policy buffers offer some insulation.
A decent forex balance, low rate of inflation (prices) and a government debt that is majority Rupee-denominated help, as does India’s robust financial sector and the recent moves to diversify trade through a plethora of FTAs (free trade agreements).
“A predictable, business-enabling environment will help unlock investment and create jobs at scale in priority sectors,” said World Bank’s present head in India, Paul Procee, adding, “Boosting private sector-led growth will be critical to strengthen economic resilience.”
A major focus of the India update has been on India’s zealous overtures on the FTA front. The country carved out deals with major markets like the UK and the EU over the course of the last financial year, and World Bank economists believe this will now reap handsome dividends in very real terms – a rise in household incomes, particularly in rural areas.
“FTAs could double India’s exposure to export markets,” said a World Bank economist, “Household incomes will rise due to tariff cuts, because prices will fall. A bigger benefit would be to rural households.”
They also played down a likely migration catastrophe emanating from the Middle East war, if droves of Indian workers in the Gulf countries return. Not only can it cause a humanitarian issue, but it will also impact India’s consumption rate and growth negatively, so the conventional thinking goes. However, World Bank officials were of the opinion that this has been overestimated and exaggerated and with India’s economic volumes growing, remittances aren’t that much of a worry on one level, and anyway, the present situation doesn’t warrant any dire scenarios. “Remittances tend to remain resilient and stable, while the number of people returning to their jobs in the Middle East is very low. Out of one crore, just a handful have returned. My experience is that remittances tend to be more stable.”
India’s brilliant economic showing in the financial year just ended (FY26), considering that most of it was during a period of tariff troubles, was because of resilient exports, massive domestic consumption, low inflation and growth in manufacturing. “Low inflation, driven by food prices, provided room for monetary policy easing to support growth amid global trade policy tensions,” the report noted. In fact, despite the US tariffs, India’s current account deficit actually narrowed in the first three quarters of FY26. This was mainly due to the consistent rise of services exports, as well as incoming remittances.
World Bank sees India GDP growth to slow down
World Bank’s growth prediction for FY27, the financial year that just started on April and goes on till March 31 of 2027, is muted: the GDP growth rate drops one full point from 7.6 per cent to 6.6 per cent. This is primarily due to the expected increase in energy costs due to the conflict in the Middle East. Food prices are expected to rise in the coming months, mainly due to the oil shock as well as the drop in value of the Indian rupee vis-à-vis the dollar. However, experts evaluate that with India’s food inflation staying pretty low anyway, a bit of a rise in inflation wouldn’t matter much.
World Bank, however, still warned that there is cause for concern for India’s high levels of debt. Interestingly, while India’s fiscal deficit itself has been consistently brought down since the peaks of the Covid years, thanks to non-tax revenue growth and expenditure consolidation, the same could not be said about financial liabilities. Public debt of the Centre (and many state governments, too, but on a comparatively lower level) remained elevated.
