Region needs reforms to create enough jobs, accelerate growth
WASHINGTON, April 8, 2026-Growth in South Asia is expected to slow to 6.3% in 2026-from 7% in 2025-due to disruptions in global energy markets, says the World Bank Group in its twice-a-year regional outlook.
Released today, the latest South Asia Economic Update, Working with Industrial Policy, projects growth to recover to 6.9% in 2027. The report says, despite the near-term slowdown, South Asia continues to grow faster than other emerging-market and developing economies. The growth outlook is 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.
Given the region's reliance on imported energy, South Asia's outlook is vulnerable to spillovers from the current conflict in the Middle East and is exceptionally uncertain. 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 could pose further downside risks. The region also needs to accelerate job creation for its expanding workforce.
"Despite a challenging global environment, South Asia's growth prospects remain strong," said Johannes Zutt, World Bank Vice President for South Asia. "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 mobilize private capital can diversify sources of growth and also create the jobs that are needed to reduce poverty and share prosperity."
The report also includes an in-depth analysis on industrial policy-the range of policy tools governments are using to shape what an economy produces, rather than leaving it to markets alone. Governments around the world are increasingly using industrial policy, and in South Asia industrial policies are implemented at roughly twice the rate of other emerging economies.
South Asia 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. But the bigger driver of new jobs outside agriculture has been the services sector, which has rarely been the target of industrial policies.
Industrial policy measures have delivered mixed results in South Asia. Import-restricting policies, for instance, were associated with significant declines in imports, but export-promoting measures were not associated with significant increases in exports.
"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," said Franziska Ohnsorge, World Bank Group Chief Economist for South Asia. "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 programs, 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-all of which are critical for job creation.
The World Bank's country development updates for Bangladesh and Nepal were also released today.
