South Asia's economic expansion is projected to decelerate to 6.3% in 2026 from an estimated 7.0% in 2025, the World Bank said on Wednesday, attributing the slowdown to spillovers from the conflict in the Middle East and disturbances in global energy markets that hit an import-dependent region.
In its most recent South Asia Economic Update, the lender maintained that the region should still lead emerging market and developing economies on growth, with a projected recovery to 6.9% in 2027. Nevertheless, the bank emphasized that the outlook carries substantial uncertainty because many South Asian economies rely heavily on imported energy and are therefore exposed to shocks originating in the Middle East.
The bank warned that additional dislocations in energy markets could push up inflation, compel central banks to tighten monetary policy and depress remittance inflows that support domestic demand in several countries across the region. World Bank President Ajay Banga said the war in the Middle East would lead to slower global growth and higher inflation, regardless of how quickly it ended.
India is expected to remain the dominant contributor to regional growth. The bank projects India's output at 7.6% in fiscal 2025/26 before moderating to 6.6% in 2026/27. The World Bank noted it had forecast growth for the current financial year at 6.3% in October 2025.
Individual country outlooks vary significantly:
- Bangladesh is forecast to expand 3.9% in fiscal 2025/26 as it recovers from political unrest.
- Bhutan is seen growing 7.1%, supported by hydropower projects.
- Sri Lanka's growth is projected to slow to 3.6% in 2026, down from 5.0% in 2025, with higher energy costs weighing on activity.
- The Maldives is expected to contract sharply to 0.7% as tourism, fuel costs and financing conditions come under pressure.
- Nepal is forecast to grow 2.3% in fiscal 2025/26, with a later rebound as the effects of unrest fade.
The bank noted that Pakistan and Afghanistan will be addressed separately in its Middle East and North Africa update, and therefore were not covered in the South Asia report.
Beyond headline growth projections, the World Bank examined policy actions across the region and found South Asian countries are pursuing industrial policies at roughly twice the rate of other emerging economies. Results from those measures have been mixed, the bank said. Specifically, import-restricting policies were associated with significant declines in imports, while measures intended to promote exports did not show meaningful gains in export performance.
Commenting on the region's prospects, Johannes Zutt, World Bank Vice President for South Asia, said, "Despite a challenging global environment, South Asia's growth prospects remain strong," and added that countries needed reforms to sustain growth, create jobs and raise resilience to shocks.
The bank's assessment underscores a delicate balance: South Asia continues to post the highest growth rates among emerging market and developing economies even as external shocks tied to energy and geopolitical instability threaten to slow activity, raise inflationary pressures and influence central bank responses across the region.