World Bank: Energy-related disruptions may slow growth in South Asia to 6.3% in 2026 from 7% in 2025

The World Bank Group's biannual regional outlook has projected that disruptions in global energy markets are expected to slow growth in South Asia to 6.3% in 2026 from 7% in 2025.

Released today, the latest South Asia Economic Update, titled "Working with Industrial Policy", projects growth to recover to 6.9% in 2027.

The report said that despite the near-term slowdown, South Asia continues to grow faster than other emerging market and developing economies.

It indicated that the growth outlook was "driven

primarily by India’s performance, underpinned by robust domestic demand as well as tariff cuts and recent trade agreements, including the free trade agreement with the European Union (EU)."

India has concluded nine Free Trade Agreements (FTAs) in the past few years, including with Mauritius, the UAE, Australia, the European Free Trade Association (EFTA), the UK, Oman, the EU, New Zealand and the United States.

In February, India’s Commerce and Industry Minister Piyush Goyal said that, courtesy of these FTAs, nearly 70% of global GDP and two-thirds of global trade is now accessible to India.

The World Bank report noted that, given the region’s reliance on imported energy, South Asia’s outlook is "vulnerable to spillovers from the current conflict" in West Asia and is exceptionally uncertain.

It added that a "prompt resolution would lift growth prospects, while further dislocation in global energy markets could raise inflation, necessitate monetary policy tightening, and dampen remittances."

In addition, global financial turbulence, climate shocks such as the recent Cyclone Ditwah in Sri Lanka, and the impact of AI adoption on service exports have been flagged as potential downside risks, underscoring the need for the region to accelerate job creation for its expanding workforce.

Johannes Zutt, World Bank Vice President for South Asia, said: “Despite a challenging global environment, South Asia’s growth prospects remain strong," adding that “countries need to implement critical policy reforms to sustain growth, create jobs, and increase resilience to shocks."

"Cross-cutting policies to improve public infrastructure, remove trade barriers, foster business-enabling environments, and mobilise private capital can diversify sources of growth and also create the jobs needed to reduce poverty and share prosperity.”

The report also analysed industrial policy, stating that in South Asia, such policies are implemented at roughly twice the rate of other emerging economies. It pointed out that the region directs about half of its industrial policy towards the manufacturing sector, targeting activities with higher employment, better wages, or larger and more productive firms than in other sectors.

However, it said that the bigger driver of new jobs outside agriculture has been the services sector, which has rarely been the focus of industrial policies.

Stating that industrial policy measures have delivered mixed results in South Asia, the report said that import-restricting policies were associated with significant declines in imports, but export-promoting measures were not associated with significant increases in exports.

World Bank Group Chief Economist for South Asia Franziska Ohnsorge said, “South Asia's mixed success on industrial policy in part reflects the region’s limited implementation capacity, fiscal space, and market size in some countries.

"While broad-based reforms remain the priority, well-calibrated industrial policies could address specific market failures, including through measures such as industrial parks, skill development programmes, market access assistance, and improving export quality standards.”

The report recommends implementing carefully designed policy measures in sectors such as urban development, tourism and digital services, alongside broad-based improvements in the underlying business environment, regulatory predictability and state capacity, as critical for job creation.