IMF raises India growth forecast to 6.5%:Flags inflation risk, weaker global growth due to West Asia war

The International Monetary Fund (IMF) has said the global economy is facing serious risks due to the conflict in the Middle East. The latest World Economic Outlook shows that growth is slowing and uncertainty is increasing. Chief Economist Pierre Olivier Gourinchas said the global economy had been growing steadily at around 3.3% in recent years. However, the war has disrupted this trend, and growth is now expected to fall to 3.1% in 2026, while inflation is likely to rise to 4.4%. Impact uneven across countries The IMF said the economic impact will vary across regions. Countries in the conflict area, low-income nations that import commodities, and emerging markets are likely to be affected the most. This will happen mainly due to higher energy and food prices, continued inflation in wages and prices, and reduced confidence leading to tighter financial conditions. The Middle East and North Africa region is expected to see a major drop in growth, with projections revised down by nearly three percentage points for 2026. Advanced economies are likely to face smaller effects. Risks remain high, but some positive factors possible The IMF warned that risks are mainly on the downside. These include a longer or wider war, new trade tensions, and uncertainty around investments in artificial intelligence. However, growth could improve if the conflict ends quickly, trade tensions ease, or productivity rises due to faster use of AI. Policy challenges for governments and central banks The IMF said policymakers must manage inflation while also avoiding actions that could slow growth further. Central banks should clearly communicate their plans and be ready to act if needed. If the conflict is short and inflation remains stable, they may wait before taking strong action. Governments have limited fiscal space, so any support should be targeted, temporary, and focused on the most vulnerable. Fiscal policies should not make it harder for central banks to control inflation. Need for long-term planning and cooperation The IMF stressed the importance of investing in energy security, especially renewable energy, to reduce future risks. Global cooperation, strong policy frameworks, and adaptability will be key to managing the current crisis and preparing for future shocks. Outlook for growth and inflation If the conflict remains limited, global growth is expected to slow to 3.1% in 2026 and slightly rise to 3.2% in 2027. Inflation may increase in 2026 before easing again in 2027. Emerging and developing economies are likely to face the biggest impact, with slower growth and higher inflation. Long-term risks and structural challenges The IMF said a longer conflict, rising geopolitical tensions, high public debt, and weak institutions could further damage growth and financial stability. Higher defence spending due to global tensions may boost economies in the short term but could also increase inflation, weaken government finances, and reduce spending on social welfare. The report also noted that conflicts can cause long-lasting economic damage, with effects continuing well beyond the immediate crisis.