ADB Upgrades India’s Growth Forecast: What’s Driving The 7.2% FY26 Estimate

India’s growth outlook  received a significant boost, with the Asian Development Bank (ADB) raising its forecast for FY26 to 7.2 per cent from an earlier estimate of 6.5 per cent. 

The sharp upgrade reflects strengthening domestic demand, particularly consumption, which has been supported by recent tax cuts and steady investment activity, reported PTI.

In its latest Asian Development Outlook released in December 2025, the Manila-based multilateral lender said India’s improved growth trajectory would also lift Asia’s overall economic expansion. The region is now expected to grow at 5.1 per cent in 2025, compared with the earlier projection of 4.8 per cent.

Consumption Takes Centre Stage

According to the ADB, the key driver behind the upgrade is resilient household consumption. Recent tax cuts have left consumers with more disposable income, translating into higher spending across sectors. As a result, India’s growth projection for 2025 has also been revised upwards to 7.2 per cent.

The report pointed out that India posted a six-quarter high GDP growth of 8.2 per cent in the July-September quarter, compared with 7.8 per cent in the previous quarter. With this performance, the economy has clocked an 8 per cent growth rate in the first half of the current financial year.

“The strong growth outcome is attributable to robust expansion of the manufacturing and services sectors on the supply side, and consumption and investment on the demand side,” the ADB noted.

Manufacturing, Services Power The Upswing

On the supply side, manufacturing and services have emerged as key growth engines. The services sector, in particular, expanded by 9.3 per cent in the first half of FY26, supported by strong domestic demand and steady external activity. The ADB expects services to remain a pillar of growth, given continued momentum in trade, transport, financial services and digital-led segments.

Investment activity has also remained firm, aided by steady credit growth. However, the ADB cautioned that domestic industrial demand could face some moderation due to softer goods exports and strong imports.

What Lies Ahead For FY27

While upgrading its near-term outlook, the ADB retained India’s FY27 growth forecast at 6.5 per cent. The moderation is attributed partly to base effects, following strong growth in the first half of FY26, and partly to expected easing in central government capital spending as fiscal consolidation continues.

Export growth could also soften amid elevated US tariffs affecting select Indian products. That said, the ADB highlighted several supportive factors that could cushion growth, including a robust rural economy, the impact of GST rate cuts, and sustained credit availability.

It added that a range of policy measures could offset some of the downside risks. These include enhanced labour market flexibility following labour law reforms, simplification of the GST framework, relaxation of import restrictions for selected products, and targeted credit relief for exporters affected by US tariffs.

RBI Sees Near-Term Strength, Later Moderation

The Reserve Bank of India (RBI) recently raised its GDP growth projection for the current fiscal to 7.3 per cent from 6.8 per cent, following the strong July–September quarter performance. However, the central bank has flagged moderation ahead, projecting growth of 7 per cent in the third quarter and 6.5 per cent in the fourth quarter.

According to the ADB, risks to the growth outlook remain broadly balanced. Downside risks stem from the potential escalation of global trade tensions and weather-related disruptions, while upside potential could emerge if ongoing trade negotiations with the US result in lower tariff rates for India.

Inflation Outlook Turns Benign

On inflation, the ADB struck an optimistic note, revising its FY26 inflation forecast down to 2.6 per cent from 3.1 per cent earlier. The moderation reflects lower-than-expected food prices, supported by favourable monsoon conditions and strong crop output, along with GST rate cuts in select sectors.

Headline inflation has eased sharply in recent months, driven by deflation in vegetables and pulses. While inflation is expected to remain subdued through FY26, the ADB cautioned that it could rise in early FY27 as base effects reverse, with the FY26 inflation forecast maintained at 4.2 per cent.

Overall, the ADB’s upgraded outlook underscores India’s resilience amid global uncertainties, with domestic consumption emerging as the primary growth anchor for Asia’s third-largest economy.