India's $5 Trillion Dream Delayed: IMF Update

India's path to becoming a $5 trillion economy is now projected to be slower than anticipated, with the IMF revising its outlook. The economy is expected to surpass $4 trillion in FY26 and reach approximately $4.96 trillion by FY28, falling just short of the $5 trillion target. This adjustment stems from a combination of factors, including softening domestic demand post-pandemic and a significant cooling of inflation, which, while beneficial for consumers, dampens nominal GDP growth.

The IMF's projections also factor in a weaker rupee and global trade headwinds. The baseline assumes an average exchange rate of Rs 84.6 to a dollar for FY25, moving towards Rs 87 by FY27. Persistent US tariffs on Indian exports and broader global trade fragmentation are expected to constrain export growth and investment sentiment, further impacting the dollar-denominated GDP figures.

Structural impediments continue to weigh on India's potential. These include labor-market rigidities, land-access challenges, and slow insolvency resolution processes, with Corporate Insolvency Resolution Process times extending significantly. Coupled with high government debt limiting fiscal expansion, these factors necessitate a focus on medium-term fiscal consolidation and more efficient spending rather than aggressive fiscal boosts to accelerate the economy's dollar-denominated growth.