India's progress toward a $5 trillion economy has been a political turning point and a policy anchor for the past few years. It is ambitious but not unachievable, and the overall macro narrative of robust reserves, declining inflation, and rapid growth has all been set up to support it. However, the IMF's 2025 staff consultation report, which was published on November 26, comes to the rather gloomy conclusion that reaching $5 trillion will take a little longer than anticipated.
India is expected to break the $4 trillion threshold in FY26 and grow to approximately $4.96 trillion by FY28, barely short of the $5 trillion milestone, according to the IMF's updated outlook.

The Fund's February estimate, which put India's FY28 GDP at $5.15 trillion, has been revised downward. As a result, the new amount is over $200 billion less.
The delay is nearly certain, according to the IMF's estimates for nominal GDP and the dollar-rupee exchange rate, as well as its assessment of India's structural impediments and recent shocks to international trade. The factors behind the headline figures and outside obstacles will determine how rapidly India's output adds up in terms of dollars, not that the country's actual growth is slowing down.
Why is strong real growth still insufficient in terms of dollars?

On paper, India’s growth narrative remains robust. The real GDP was estimated by the IMF to be 6.6% in FY26 and 6.2% in FY27. However, the $5 trillion milestone is merely a nominal, dollar-denominated benchmark. Furthermore, influences that don't necessarily coincide with actual activity shape nominal growth.
The IMF noted that inflation has considerably decreased and domestic demand has started to decline following the post-pandemic recovery. It stated that headline inflation is predicted to drop to 2.8% in FY26, a notable decline fueled by changes in food prices and the reduction in the GST rate. This is a relief for households, but it is a drag for nominal GDP.

The nominal pie grows more slowly when inflation declines more quickly than actual growth. And this has a big impact on the precise calculations of dollar GDP.
To what extent does the depreciation of the rupee impact the computation?
The second, and maybe most important, determining factor in the IMF's assessments is currency dynamics. Due to a number of international uncertainties, stricter financing requirements, tariff-driven trade fragmentation, and sporadic capital-flow constraints, the Fund's forecasts call for a declining rupee over the coming years.
The exchange-rate assumptions included in the IMF's most recent baseline predictions are mostly to blame for India's lower GDP statistic in dollars. The fund had projected an average rate of Rs 82.5 to a dollar for FY25 in the 2023 assessment.

Although the research did not predict a catastrophe, it did identify enough stress in the external environment to suggest permitting more exchange-rate flexibility and only taking action to stop unruly movements. That position indicates that the rupee will experience periods of decline.
Even if the domestic economy is functioning rather well, every percentage point decline in the rupee puts India's dollar-denominated GDP further away from the $5 trillion mark.
What impact are tariffs and obstacles to international commerce having on output?
The IMF's baseline tightens the leash around India's immediate external prospects by assuming that US tariffs on Indian exports will continue. According to the paper, such trade actions and more general fragmentation tendencies will probably lower the terms of trade, dampen investor sentiment, and slow India's export development.Although government assistance for tariff-affected exporters was noted in the study, the effects are only somewhat mitigated.
What structural problems are preventing India from reaching its full potential?
The IMF identified persistent barriers that still affect private investment and productivity:
• Rigidity in the labor market
• Problems with land access
• Slow resolution of insolvency
According to the research, recovery rates have decreased while Corporate Insolvency Resolution Process (CIRP) timeframes have increased to more than 700 days. This reduces business dynamism and slows down private investment's ability to effectively reallocate capital.
The IMF pointed out that private investment is still uneven. The majority of the work has been done by public investment, but the large amount of general government debt (81.1% of GDP in FY26 and 80.0% in FY27) restricts the fiscal space available for further expansion.

What is the reason behind the IMF's "tight fiscal box" warning?

The IMF is equally cautious in its fiscal policy message. Although it endorses the government's short-term consolidation strategy, it cautions that the GST and PIT rate reductions should be closely watched since they may further reduce the tax base. India must exercise caution due to its high debt levels since it is not feasible to boost nominal GDP through fiscal expansion.
This limits the budget's capacity to serve as a quick route to the $5 trillion breakpoint. Rather, the IMF advocated for more effective spending, targeted assistance, medium-term consolidation, and improved state-level budget management.

What comes next?
When considered collectively, the IMF's evaluation is realistic rather than too negative. India's economy is still expanding more quickly than the majority of other big economies. The reserves are substantial, inflation is under control, and the financial system as a whole is stable.
The trajectory might yet be tipped upward by a stronger rupee, quicker productivity growth, a resurgence of private investment, and a reduction in international tensions. However, the finish line has moved a little further according to the IMF's current forecasts.