World Bank Group has projected that economic growth in South Asia will slow to 6.3% in 2026, down from 7% in 2025, according to its latest South Asia Economic Update (April 2026). The slowdown is largely attributed to global energy market disruptions, particularly due to geopolitical tensions. However, the region is expected to recover to 6.9% growth in 2027, maintaining its position as the fastest-growing region among emerging and developing economies.
Report Highlights
South Asia Growth Trends
- Growth expected to decline to 6.3% in 2026 (from 7% in 2025)
- Recovery projected to 6.9% in 2027
- Slowdown driven by external global factors, not domestic weaknesses
- South Asia includes: India, Bangladesh, Sri Lanka, Nepal, Bhutan, Maldives, Pakistan
Uneven Growth Across Countries
- Bhutan: 7.1% (hydropower-driven growth)
- Bangladesh: 3.9% (recovery phase)
- Sri Lanka: 3.6%
- Nepal: 2.3%
- Maldives: 0.7% (tourism and energy challenges)
Role of India
- Regional growth largely driven by India’s economic performance
- Supported by:
- Strong domestic demand
- Tariff reductions
- Trade agreements (including FTA with EU)
- India remains the key growth engine of South Asia
Impact of Global Challenges
- High dependence on imported energy makes region vulnerable
- Risks from Middle East conflicts affecting oil supply
- Potential impacts:
- Higher inflation
- Tighter monetary policy
- Reduced remittances
- Slower economic activity
Inflation and Energy Concerns
- Rising fuel costs may increase inflation
- In India:
- Slight inflation rise expected in FY26 & FY27
- Balanced by stable food prices
- Inflation measured using Consumer Price Index (CPI)
Structural Challenges & Reforms
- Need for job creation and industrial expansion
- Focus on economic resilience and productivity
- Weak export performance despite import restrictions
- Need to improve trade competitiveness
Industrial Policy Insights
- South Asia uses industrial policy at twice the rate of other emerging economies
- ~50% policies focused on manufacturing sector
Key Issue
- Services sector (major job creator) receives less policy attention
- Important sectors:
- Tourism
- Digital services
- Urban development
Outcome
- Import restrictions reduced imports
- Export promotion policies less effective
Additional Risks
- Global financial volatility
- Climate shocks (e.g., cyclones like ditwah in Sri Lanka)
- Impact of Artificial Intelligence on service exports
- Growing challenge of employment generation for large workforce