The World Bank Group has projected that economic growth in South Asia will slow to 6.3% in 2026, down from 7% in 2025, mainly due to disruptions in global energy markets. According to the latest South Asia Economic Update released on 8 April 2026, the region is expected to recover to 6.9% growth in 2027. Despite the near-term slowdown, South Asia is still forecast to remain the fastest-growing region among emerging-market and developing economies.
The report notes that the region’s growth outlook continues to be driven largely by India’s economic performance. Strong domestic demand in India, along with tariff reductions and recent trade agreements—including a free trade agreement with the European Union—are expected to support regional momentum. This means that while overall growth is moderating, South Asia still retains relatively strong medium-term prospects compared to other developing regions.
However, the World Bank warned that the outlook is highly uncertain because South Asia depends heavily on imported energy. As a result, the region is particularly vulnerable to spillover effects from the ongoing conflict in the Middle East. If the conflict is resolved quickly, growth prospects could improve. But if disruptions in global energy markets continue, South Asia could face higher inflation, tighter monetary policy, weaker remittance flows, and slower overall economic activity.
The report also highlights several other downside risks that could further weaken the region’s outlook. These include global financial volatility, climate-related shocks such as Cyclone Ditwah in Sri Lanka, and the possible effects of artificial intelligence adoption on service exports. In addition to managing these external risks, South Asian economies are under growing pressure to create enough jobs for their rapidly expanding workforce, making employment generation a key policy challenge.
Johannes Zutt, World Bank Vice President for South Asia, said that despite the difficult global environment, the region’s growth prospects remain strong if governments take the right policy actions. He emphasized the importance of reforms that improve public infrastructure, remove trade barriers, strengthen business-friendly conditions, and mobilize private capital. According to the World Bank, these broader reforms can help diversify growth sources, improve resilience to shocks, and generate the jobs needed to reduce poverty and promote shared prosperity.
A major focus of the report is the role of industrial policy, which refers to government measures aimed at shaping what the economy produces rather than leaving outcomes entirely to market forces. The World Bank noted that governments in South Asia are using industrial policy at roughly twice the rate seen in other emerging economies. About half of these policies are directed toward the manufacturing sector, often with the aim of supporting industries that can generate more jobs, pay higher wages, or improve productivity.
At the same time, the report points out that services—not manufacturing—have been the main source of new jobs outside agriculture in South Asia. Yet services sectors have received far less attention from industrial policy. This mismatch suggests that governments may need to better align their policy tools with the sectors that are actually driving employment and growth, especially in areas such as tourism, digital services, and urban development.
The World Bank found that industrial policy in South Asia has produced mixed results. Measures designed to restrict imports have generally succeeded in reducing imports, but export-promotion policies have not led to similarly strong gains in exports. This suggests that while governments have been active in shaping trade and production patterns, many interventions have not yet delivered the intended competitiveness or export outcomes.
Franziska Ohnsorge, World Bank Group Chief Economist for South Asia, said the mixed performance of industrial policy reflects deeper structural limitations, including weak implementation capacity, limited fiscal space, and smaller domestic markets in some countries. She stressed that broad-based reforms should remain the top priority, but added that carefully designed industrial policies can still play a useful role in addressing specific market failures. Examples include industrial parks, skills development programmes, support for market access, and measures to improve export quality standards.
Overall, the report recommends that South Asian countries combine well-targeted sectoral policies with wider reforms to improve the business environment, strengthen regulatory predictability, and build state capacity. The World Bank believes this balanced approach will be essential for sustaining growth, increasing resilience, and creating the large number of jobs the region will need in the years ahead.
