World Bank Projects 7.6% GDP Growth for India in FY26, Raises FY27 Forecast to 6.6%

South Asia's Economic Growth Outlook Remains Strong Despite Near-Term Challenges

The World Bank Group has released its latest South Asia Economic Update, which projects strong economic growth for the region despite near-term challenges. According to the report, South Asia's growth is expected to recover to 6.9% in 2027, driven primarily by India's performance, which is underpinned by robust domestic demand as well as tariff cuts and recent trade agreements, including the free trade agreement with the European Union.

India is expected to remain the main driver of regional growth, with output projected at 7.6% in fiscal 2025/26 before easing to 6.6% in 2026/27. The World Bank had previously forecast growth for the current financial year at 6.3% in October 2025. The report highlights India's key role in driving regional growth, with the country's strong economic performance having a significant impact on the overall growth outlook for South Asia.

Growth Outlook by Year

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While the growth outlook for South Asia remains strong, the region is not without risks. Disruptions in global energy markets, which could slow growth to 6.3% in 2026 from 7% in 2025, pose a significant challenge to the region's growth prospects. The World Bank warns that a prompt resolution to the current conflict in the Middle East would lift growth prospects, while further dislocation in global energy markets could raise inflation, necessitate monetary policy tightening, and dampen remittances.

In addition to energy market disruptions, the report highlights several other risks that could slow South Asia's growth, including global financial turbulence, climate shocks, and the impact of AI adoption on service exports. The region also needs to accelerate job creation for its expanding workforce.

The World Bank emphasizes the importance of implementing critical policy reforms to sustain growth, create jobs, and increase resilience to shocks. In its report, the organization highlights the need for cross-cutting policies to improve public infrastructure, remove trade barriers, foster business-enabling environments, and mobilize private capital.

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Industrial Policy in South Asia

The report also includes an in-depth analysis of industrial policy in South Asia, which has been implemented at roughly twice the rate of other emerging economies. The region directs about half of its industrial policy to the manufacturing sector, targeting activities with more employment, higher wages, or larger or more productive firms than in other sectors. However, the services sector has been the bigger driver of new jobs outside agriculture, despite rarely being the target of industrial policies.

Industrial policy measures have delivered mixed results in South Asia, with import-restricting policies associated with significant declines in imports, but export-promoting measures not associated with significant increases in exports. The World Bank notes that the region's limited implementation capacity, fiscal space, and market size in some countries have contributed to the mixed success of industrial policy measures.

To address these challenges, the World Bank recommends well-calibrated industrial policies that could address specific market failures, including through measures such as industrial parks, skill development programs, market access assistance, and improving export quality standards.