OECD Bullish On India Amid External Headwinds

Mumbai: Global economic prospects are weakening, with substantial barriers to trade, tighter financial conditions, diminishing confidence and heightened policy uncertainty projected to have adverse impacts on growth, OECD (Organisation for Economic Co-operation and Development) warned on Tuesday.

Although the OECD projects global growth slowing from 3.3% in 2024 to 2.9% in both 2025 and 2026, India’s GDP is projected to grow by 6.3% in FY26 and 6.4% in FY27.

“Private demand will drive India’s growth amid emerging external headwinds. The consumption is supported by rising real incomes and lower personal income taxes. Investment will remain strong, bolstered by easing financial conditions. However, export growth is expected to slow due to weaker global demand, the impact of higher tariffs and heightened trade policy uncertainty,” official OECD circles from Paris told The Free Press Journal.

The RBI began its current easing cycle in February 2025, followed by a second policy rate cut in April. Despite the cumulative 50 bps reduction, which lowered the policy rate from 6.5% to 6.0%, financial conditions remain tight. Monetary policy is expected to ease further over FY26 as headline inflation remains within the target range over 2025 due to the moderation of food and energy prices, which make up a large share of the consumer price index.

Headline inflation in India is projected to average 4.1% in FY25-26 and 4.0% in FY26-27. There is scope for the central bank to reduce the policy rate towards a more neutral level. A further 25-basis point cut is expected by the end of 2025. Inflation expectations remain well anchored, and wage pressures are expected to remain contained with the economy projected to grow around potential, suggesting limited demand-driven inflation pressures, OECD said.

“Weakened economic prospects, will however, be felt around the world, with almost no exception. Although inflation has recently declined in most countries, service price inflation remains stubbornly sticky and goods price inflation has increased slightly in many countries due to rising food prices,” underlines Álvaro Pereira, OECD Chief Economist.

Protectionism, Pereira said, is adding to inflationary pressures, and inflation expectations have risen substantially in several countries.

“Investment in India will be supported by declining interest rates and substantial public capital spending, but higher US tariffs will weigh on exports. A less benign monsoon season or higher global commodity prices could drive up food prices and inflation,” OECD added.

With inflation firmly within the target range, monetary policy is gradually expected to become more accommodative. OECD said, fiscal prudence and reforms are important to sustain India’s growth. Phasing out tax expenditures, rationalising subsidies, and expanding tax bases would improve the quality and sustainability of public finances, creating room for expanding social protection, higher public investment, and active labour market policies. Although female employment has increased markedly, from 17.5% in FY2017–18 to 31.7% in FY23–24, strengthening women’s access to formal jobs will require coordinated reforms in childcare availability, safe and affordable transportation, skill-building, and enforcement of workplace protections.

“Enhancing the availability and accessibility of long-term finance, including through deepening capital markets and improving credit access for SMEs, would further strengthen the investment climate,” OECD added.

“The government is expected to pursue fiscal consolidation, bringing the budget deficit from 4.8% of GDP in FY 2024-25 to 4.4% in FY 2025-26, with local governments projected to adopt a similar stance,” OECD said.