India’s economy is projected to grow at 6.5% in FY26, according to a report by Bank of Baroda (BoB), but escalating tariff tensions with the U.S. pose significant downside risks. While domestic demand, government reforms, and investment momentum are expected to support growth, the recent 50% U.S. tariff shock on Indian exports could weigh on external trade and slow the recovery trajectory.
The forecast highlights a delicate balancing act—maintaining robust domestic momentum while navigating external headwinds.
Growth Drivers in FY26
Bank of Baroda’s outlook rests on several supportive domestic factors:
Consumption: Stable urban demand and an expected rebound in rural spending.
Investment: Strong government-led infrastructure push under NaBFID and private sector participation.
Policy Reforms: GST 2.0 rationalization, tax reforms, and ease-of-doing-business measures.
These pillars are expected to sustain growth momentum despite global volatility.
The Tariff Risk Factor
The U.S., which accounts for nearly 20% of India’s exports, has imposed steep tariffs that directly impact labour-intensive sectors such as textiles, leather, and gems & jewellery.
Bank of Baroda cautioned that while India’s domestic growth drivers remain intact, prolonged tariff pressures could:
Lower export competitiveness.
Reduce job creation in export-linked sectors.
Dampen overall GDP growth if trade volumes decline sharply.
Policy Perspective
The report notes that policymakers will need to mitigate risks through diversification and reforms. Suggested measures include:
Expanding trade relations with Europe, Africa, and ASEAN nations.
Offering targeted relief and incentives to exporters.
Maintaining fiscal and monetary flexibility to counter external shocks.
The challenge will be to sustain momentum without compromising fiscal discipline or inflation control.
Why This Matters
For Policymakers: Balancing domestic strength with external resilience is critical.
For Businesses: Exporters must adapt by exploring new markets and improving competitiveness.
For Citizens: Growth resilience will shape jobs, incomes, and consumer confidence in FY26.
India’s growth story remains strong at 6.5%, but tariff headwinds are a reminder that global risks can quickly alter the trajectory.
