Why IMF says India's $5 trillion economy goal may take longer than expected

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For a few years now, India’s march toward becoming a $5 trillion economy has served as both a policy anchor and a political milestone. It is ambitious but not impossible, and the broad macro story consisting of high growth, falling inflation, strong reserves, have been all set to support it. Yet, the IMF's 2025 staff consultation report, released on November 26, paints a slightly sobering conclusion, that the path to $5 trillion will be a bit slower than imagined.

 

According to the IMF’s updated outlook, India is projected to surpass the $4 trillion threshold in FY26 and expand to roughly $4.96 trillion by FY28, just short of the $5 trillion milestone. This is a downward revision from the Fund’s February estimate, which had placed India’s FY28 GDP at $5.15 trillion. The new figure is therefore lower by close to $200 billion.

 

The IMF’s projections for nominal GDP and the dollar-rupee exchange rate, combined with its reading of India’s structural bottlenecks and new global trade shocks, states that the delay is almost inevitable. However, it is not that India’s real growth is losing steam but the dynamics beneath the headline numbers and external headwinds are set to determine how quickly India’s output adds up in dollar terms.

 

Why does robust real growth still fall short in dollar terms?

 

On paper, India’s growth narrative remains robust. The IMF pegged the real GDP at 6.6 per cent in FY26, followed by 6.2 per cent in FY27. But the $5 trillion milestone is a nominal, dollar-denominated threshold. And nominal growth is shaped by forces that do not always move in lockstep with real activity.

 

The IMF pointed out that domestic demand has begun to soften after the post-pandemic rebound, and inflation has cooled significantly. Headline inflation, it noted, is expected to fall to 2.8 per cent in FY26, a striking drop driven by food-price corrections and the GST rate cut. For households, this is welcome relief but for nominal GDP, it is a drag.

 

When inflation falls faster than real growth rises, the nominal pie expands more slowly. And in the strict arithmetic of dollar GDP, this matters significantly.

 

How much is the rupee weakening affecting the calculation?

 

Currency dynamics are the second, and perhaps the bigger decisive factor in the IMF’s calculations. The Fund’s projections assume a weaker rupee over the next few years, reflecting a host of global uncertainties, tighter financing conditions, tariff-driven trade fragmentation, and episodic capital-flow pressures.

 

India’s lower GDP figure in dollar terms is largely a result of the exchange-rate assumptions built into the IMF’s latest baseline projections. In the 2023 assessment, the fund had assumed an average rate of Rs 82.5 to a dollar for FY25. Now in its 2025 update, this has been adjusted to Rs 84.6. For FY26, the IMF estimates the rupee at 87 to a dollar, followed by 87.7 in FY27. With each revision, India’s GDP shrinks when measured in dollars.

 

The report did not forecast a crisis but it sees enough stress in the external environment to recommend allowing greater exchange-rate flexibility while intervening only to prevent disorderly movements. That stance signals a belief that the rupee will face bouts of depreciation.

 

And every percentage point drop in the rupee pushes India’s dollar-denominated GDP further away from the $5 trillion line even if the domestic economy is doing reasonably well.

 

How are tariffs and global trade headwinds weighing on output?

 

The IMF’s baseline assumes that US tariffs on Indian exports persist, tightening the leash around India’s near-term external prospects. The report explained that such trade actions and broader fragmentation trends will likely depress India’s export growth, soften investment sentiment, and weaken the terms of trade.

 

The report acknowledged government support for tariff-hit exporters, but these efforts only partially cushion the impact.

 

What structural issues are slowing India’s potential growth?

 

The IMF flagged long-standing constraints that continue to weigh on productivity and private investment:

 

• labour-market rigidities

• land-access challenges

• slow insolvency resolution

 

The report highlighted that Corporate Insolvency Resolution Process (CIRP) times have extended to over 700 days, while recovery rates have fallen. This eats into firm dynamism and limits the speed at which private investment can redeploy capital efficiently.

 

Meanwhile, private investment, the IMF noted, remains uneven. Public investment has been doing the heavy lifting, but high general government debt (81.1 per cent of GDP in FY26, and 80.0 in FY27) limits the fiscal room to push even harder.

 

Why does the IMF warn of a ‘tight fiscal box’?

 

The IMF’s message on fiscal policy is equally cautionary. While it supports the government’s near-term consolidation path, it warns that both the GST and PIT rate cuts need close monitoring because they could narrow the tax base further. High debt levels mean India must tread carefully because fiscal expansion to turbocharge nominal GDP is not a viable option.

 

This restricts the ability to use the budget as a fast lane to the $5 trillion checkpoint. Instead, the IMF pushed for medium-term consolidation, more efficient spending, targeted support, and stronger state-level fiscal management.

 

What next?

 

Taken together, the IMF’s assessment is not really pessimistic but it is realistic. India continues to grow faster than most major economies. Inflation is under control, the Reserves are strong, and the overall financial system is stable.

 

A stronger rupee, faster productivity gains, a revival in private investment, and easing global tensions could still tilt the trajectory upward. But based on the IMF’s current projections, the finish line has shifted a bit further.