Whalesbook
South Asia Growth Outlook Slows
The World Bank now expects South Asia's economic growth to slow to 6.3% in 2026, down from an estimated 7% in 2025. A projected recovery to 6.9% in 2027 offers some relief, but the immediate slowdown points to weaknesses. The region is still expected to grow faster than other emerging and developing economies, mainly driven by India's steady performance.
India's Robust Demand and Trade Agreements
India's economy is seen as the main engine for regional growth. Strong domestic demand, along with tariff reductions and recent trade pacts, including a free trade agreement with the European Union, provides a solid foundation. India has secured nine Free Trade Agreements (FTAs) in recent years, granting access to approximately 70% of global GDP and two-thirds of global trade, according to Commerce and Industry Minister Piyush Goyal.
Global Energy Costs and Geopolitical Tensions
South Asia's dependence on imported energy means its growth is especially sensitive to global market ups and downs. The World Bank report highlights potential impacts from the conflict in West Asia as a major risk. A lengthy conflict could drive up inflation, force central banks to raise interest rates, and lower remittances. A quick resolution, however, would boost growth.
Other Key Risks and Policy Needs
Besides energy issues, other major risks include global financial instability, severe climate events like Cyclone Ditwah in Sri Lanka, and the changing effects of artificial intelligence on services exports. These factors highlight the urgent need to create more jobs to employ the region's growing population. Johannes Zutt, World Bank Vice President for South Asia, stressed the importance of key policy reforms to sustain growth, create jobs, and build economic strength. He added that better public infrastructure, fewer trade barriers, and more business-friendly conditions are crucial for developing new growth areas and reducing poverty.
Industrial Policy: Mixed Outcomes
The report also looked at industrial policy, finding it's being implemented at twice the rate seen in other emerging economies, mainly targeting manufacturing. However, these policies have often missed the services sector, which creates more jobs than agriculture outside of farming. Policies aimed at restricting imports have worked to lower import numbers, but efforts to promote exports haven't significantly increased them, the Bank noted. Franziska Ohnsorge, Chief Economist for South Asia, explained these mixed results are partly due to countries having limited ability to carry out policies, less financial room to spend, and smaller markets. She suggested that while wide-ranging reforms are essential, carefully designed industrial policies could help fix particular market problems.