IMF's bullish call: Why is India sprinting when the world stumbles?

The International Monetary Fund’s latest upgrade of India’s growth forecast to 7% for both 2026 and 2027 offers a striking contrast with an increasingly fragile global economy. The IMF expects worldwide growth of just 3.1% this year, with expensive energy and geopolitical turmoil threatening to erode the resilience of several economies.

India, meanwhile, has delivered 7.8% growth in the April-June quarter, prompting a succession of international institutions to revise their projections upwards, the IMF being the latest. The explanation goes beyond a strong quarter or a booming services sector. India’s advantage increasingly lies in the interaction between domestic demand, infrastructure investment, healthier corporate balance sheets and new sources of private capital expenditure. The risks are real but the economy is showing a greater capacity to absorb external shocks than many forecasters had anticipated.

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India sprints, world stumbles

The IMF’s World Economic Outlook 2026, titled 'Resilience Under Strain, Urgent Choices', captures the divergence between India and much of the rest of the world. Global growth is forecast at 3.1% in 2026, against 3.5% last year. The IMF forecasts US growth of 2.3% for both 2026 and 2027, unchanged for this year and 0.1 percentage point higher for next year. China is forecast to grow at 4.5% for 2026 and 4.0% for 2027, both down 0.1 percentage point from July amid higher oil prices, structural headwinds and persistent uncertainty. The IMF expects global output to expand by an average 3.2% annually during 2028-31, below the 3.7% average recorded in 2000-19.

India stands out even in this subdued landscape. The IMF has raised its FY27 growth estimate from 6.4% to 7% and its FY28 projection from 6.7% to 7%.

Other forecasters too have made similar estimates. The World Bank has raised its FY27 estimate to 7.1% from 6.6%, while the Reserve Bank of India has increased its projection to 7.1% from 6.7%. BMI, a unit of Fitch Solutions, has gone further, raising its forecast to 7.5% from 6.8%, citing stronger momentum and AI-related investment. Moody’s Ratings had also upgraded its FY27 forecast to 7% in September.

These forecasts are not identical because they use different assumptions and may reflect different assessment periods. Their common message, however, is that India's underlying growth has proved stronger than expected.

Domestic demand is the first line of defence

India’s biggest advantage is the size of its domestic market. When global demand weakens, export-dependent economies can lose momentum quickly. India too is exposed to international trade through merchandise exports, information technology and business services, but its growth is also supported by a substantial base of household consumption and investment at home.

The April-June GDP numbers illustrate this cushion. Private consumption grew 7.1%, accelerating from 6.8% a year earlier. Gross fixed capital formation, a measure of investment in productive assets, surged 11.9%. Manufacturing expanded 9.2%, while services maintained strong momentum. Exports grew around 12%, according to the September 1 report, defying concerns that geopolitical tensions and trade disruption would undermine external demand.

The significance lies in the breadth of the expansion. Growth was not resting on government expenditure or a single booming industry. Households were spending, businesses were investing and exporters were finding demand despite the difficult external environment.

Earlier income-tax relief and GST rationalisation have also helped support consumption. Healthy credit growth and improved financial conditions have made it easier for households to spend and companies to finance expansion. Strong vehicle sales provided another indication that demand had not buckled under the pressure of rising energy prices.

While this domestic base does not make India immune to a global slowdown, it does give the economy more room to manoeuvre when overseas markets become volatile.

Infrastructure has changed the economy’s shock absorbers

The infrastructure push is central to understanding why India's growth has become harder to derail. Since 2014-15, annual central government capital expenditure has increased nearly sixfold to approximately Rs 12 lakh crore.

Roads, railways, ports, airports and power networks support GDP directly through construction spending but their longer-term contribution can be more important. Better logistics reduce the time and cost of moving goods, improved electricity supply supports industrial production and more reliable transport networks make it easier for businesses to expand beyond established commercial centres. Infrastructure also helps attract private investment. A company considering a factory, warehouse or data centre is more likely to commit capital when power, transport and connectivity are dependable. Public investment can therefore create the conditions for private capital expenditure to accelerate rather than permanently substitute for it.

The latest investment figures suggest that this transition is now under way after a long lull. Gross fixed capital formation rose to 34.3% of GDP in the first quarter, against 31.4% a year earlier. The September analysis also reported a substantial increase in private-sector capital investment. Sustained growth above 7% cannot depend indefinitely on government spending alone. The more private companies invest in new capacity, the more durable the expansion can become.

There is a fiscal trade-off too as infrastructure spending competes with other priorities, while elevated energy prices could require additional subsidies. But the productivity gains from completed infrastructure can continue well after the initial expenditure has been made.

Various economic reforms such as the GST and digitalisation add more speed and efficiency to the economy so it becomes not only stronger but also more resilient to shocks.

AI is creating another investment cycle

A new source of capital expenditure is emerging alongside traditional infrastructure. The AI boom is generating investment in data centres, computing capacity, electricity generation and transmission, fibre networks and cooling systems. India is positioning itself to capture a growing share of this spending as companies expand their cloud and AI infrastructure.

BMI’s latest assessment identifies planned investments by Reliance, Adani, Amazon Web Services and Microsoft as an important source of support for growth. Amazon announced a further $13 billion investment in its Indian AI and cloud infrastructure in June, taking its announced investment commitments in the country to $48 billion. Adani has separately announced plans to invest $100 billion in renewable-energy-powered AI data centres by 2035.

The economic impact of these commitments extends beyond technology companies. Data centres require construction, electrical equipment, power supply and connectivity. They create demand for industrial inputs and engineering services, while cloud infrastructure can help businesses across sectors deploy digital tools.

The IMF also sees AI readiness as an increasingly important determinant of medium-term growth globally. But there is a difference between building the infrastructure and capturing the productivity gains. India will need reliable electricity, skilled workers and widespread business adoption to convert the investment boom, which has just begun, into sustained improvements in output.

There is also a timing risk. BMI has raised its FY27 growth forecast to 7.5% but cut its FY28 projection to 6.3% from 6.5%. Its more cautious medium-term outlook reflects the possibility that expensive energy and weather disruptions could outweigh some of the near-term investment gains. The investment cycle is promising, but it does not guarantee uninterrupted acceleration.

Also Read | IMF sounds alarm on mounting fiscal strains as major economies grapple with high debt

Healthier balance sheets are helping private investment return

India's growth model has also benefited from a repair of corporate and banking balance sheets after the stressed-loan problems of the previous decade. Banks are in a better position to extend credit, while lower corporate leverage has given companies more room to finance expansion.

Reuters reported in September that private-sector capital investment had increased by more than Rs 5 lakh crore year on year. Corporate capital expenditure had risen 11% in FY26, supported by stronger factory utilisation, healthier balance sheets and robust bank credit growth.

While public infrastructure expenditure can sustain demand during uncertain periods, a broader investment recovery requires companies to believe that future demand will justify new factories, equipment and technology. Rising utilisation gives businesses a reason to add capacity rather than simply sweat existing assets.

Manufacturing growth of 9.2% in the April-June quarter provides evidence of that momentum. Strong financial, real estate and professional services, which grew 12.1%, offer another source of demand. Manufacturing and services are reinforcing each other through investment, business services, financing and logistics.

Structural reforms have contributed to this environment. The GST system, digital public infrastructure, logistics improvements and production-linked incentives in selected manufacturing industries have helped formalise transactions and improve the conditions for business expansion. Their individual effects vary, and none alone explains the growth rate. But together, they form part of the institutional groundwork supporting investment.

Why an oil shock has not derailed growth

India's performance is especially striking because the country remains heavily dependent on imported crude. The September Moody's assessment warned that prolonged high energy prices could increase inflation, widen the current account deficit and weaken household purchasing power. Those risks have not disappeared.

Higher oil prices affect India through several channels. They increase the import bill, raise transport and manufacturing costs and can put pressure on the rupee. If companies pass these costs on to consumers, households have less money available for other purchases. If the government absorbs part of the increase through subsidies or tax adjustments, the pressure can shift towards public finances.

But the first-quarter figures suggest that these effects had not overwhelmed domestic activity. Consumption and investment expanded, manufacturing remained strong and exports held up. India's ability to source crude from different suppliers, including Russia, has also offered refiners some flexibility when traditional supply routes are disrupted.

Infrastructure and domestic demand help explain the resilience, but they cannot neutralise an energy shock indefinitely. The IMF's latest assumptions put the average oil price at $95.74 a barrel in 2026, a 41% increase from 2025, before easing to $87.39 in 2027. A prolonged disruption could therefore change India's growth calculation.

Moreover, inflation has already emerged as a concern. Retail inflation rose to 5.54% in September from 4.8% in August. BMI has also flagged El Niño-related disruptions as a risk to agricultural output and rural incomes. Higher food prices combined with expensive fuel could erode the very consumption that has helped insulate the economy.

Caution: Resilience has limits

The IMF's GDP growth upgrade is an endorsement of India's growth momentum but not a declaration that its structural problems have been solved. The economy still needs more productive jobs, stronger manufacturing competitiveness and sustained improvements in productivity if rapid growth is to translate into broad-based gains in living standards.

External trade also remains a vulnerability. The UK and EU trade agreements could lower barriers, improve market access and encourage investment, as the IMF notes, but the benefits will depend on implementation and whether Indian firms can compete effectively in new markets. Tariff disputes and weaker demand in major export destinations could still hurt particular industries.

The distribution of AI investment is also important. Data centres require enormous amounts of electricity and capital, yet their contribution to employment may be smaller than that of more labour-intensive industries. India will need to turn digital investment into productivity gains across manufacturing, agriculture and services.

For now, the IMF's forecast captures a real divergence. Much of the world is struggling with energy costs, geopolitical uncertainty, public debt and weak medium-term growth prospects. India has a large domestic market to sustain demand, infrastructure that is gradually reducing economic bottlenecks, a more efficient economy due to various reforms and a private investment cycle that appears to be broadening.

However, the crucial test is whether these strengths can withstand a prolonged external shock. The 7.8% quarterly growth figure suggests India is better equipped to absorb disruption than pessimists expected but sustaining growth around 7% will require investment to keep expanding without letting energy inflation, weak rural incomes or fiscal pressures undermine demand. India is sprinting for now, but keeping that pace will depend on whether its growing capacity translates into lasting productivity gains.