Domestic components of demand have played a key role in supporting growth in Q1FY26 and are expected to remain so in the next half year as well, the finance ministry said in a report.
India’s GDP growth was at 7.8% in the June quarter, surprising on the upside.
GST reform and domestic consumption
Recognising the need to strengthen domestic growth drivers amid these heightened external-sector risks, the government has announced a rationalisation of the Goods and Services Tax regime.
“This move is expected to lower the tax burden on consumers, boost consumption, and provide a cushion against tariff impacts,” the ministry said in its August monthly economic review. Additionally, it is likely to improve demand visibility for firms, enabling them to expand investment in additional capacities, it said.
“With the reform push, there is a further upside bias on the growth prospects of the country,” the ministry said.
Recently, Fitch Ratings raised India’s GDP growth forecast to 6.9% from 6.5% for FY26. In the Economic Survey, the finance ministry has pegged the economic growth between 6.3-6.8% for FY6.
In the latest report, the ministry said inflation is expected to remain well under control, with replenished reservoirs auguring well for the winter crop.
“Additionally, the revision in GST rates may lead to a one-time reduction in inflation over the next year,” it said.
External Headwinds
Despite trade and tariff-related headwinds, India’s external sector has remained resilient.
“However, the recent US imposition of a one-time fee of US$100,000 for all future H-1B visas cause disruptions, the impact of which—particularly on the growths of future remittances and service trade surpluses—will need close monitoring if the restrictions persist,” it said.
India is also expanding its economic partnerships, signing a bilateral investment treaty with Israel and preparing a Comprehensive Economic Partnership Agreement with Oman to reduce duties, boost investment, and diversify trade beyond energy imports.
“This is not the time to drop our guard. Uncertainties and risks persist,” it said, adding that for now, the risks appear manageable, but they are there.
If the US tariff uncertainties persist, there will be an impact on export sectors, with spillover risk to domestic employment, income and consumption.
The central government’s reform agenda is expected to cushion the economy against the adverse effects of trade disruptions, it added.
“The near-term outlook, therefore, is characterised by steady, reform-driven growth rooted in macroeconomic discipline and adaptive economic diplomacy, with ongoing vigilance warranted against external shocks and global market volatility,” the ministry said.
The US has imposed an additional 25% “ad valorem” duty on Indian goods for buying Russian crude, effective August 27, taking the total tariff levy on Indian goods to 50%. The tariff increase could make Indian goods uncompetitive as many other Asia Pacific countries attract a 15-20% tariff.