India’s economic growth is projected to accelerate to 6.5 per cent in the current fiscal (FY26), up from the World Bank’s June estimate of 6.3 per cent, according to the latest South Asia Development Update (Sadu) 2025: ‘Jobs, AI, and Trade’ released on Tuesday. However, the multilateral agency warned that growth could moderate to 6.3 per cent in FY27 due to escalating US tariffs on Indian exports.
“Domestic consumption remains strong, and favourable rural wages and agricultural output have supported growth,” the report said, noting that the government’s recent reforms to the Goods and Services Tax (GST), which reduced tax brackets and simplified compliance, are expected to further stimulate economic activity.
The report highlighted a major downside risk for India’s medium-term outlook: the US has imposed a 50 per cent tariff on about three-quarters of Indian goods exports, which account for nearly one-fifth of India’s shipments to the US, equivalent to roughly 2 per cent of GDP. Initially expected to face lower tariffs than its competitors, India now confronts significantly higher rates than anticipated.
South Asia as a whole is projected to grow 6.6 per cent in 2025, but a slowdown to 5.8 per cent is expected in 2026, revised down 0.6 percentage points from earlier forecasts. “Spillovers from global economic slowdown, trade policy uncertainty, socio-political unrest, and labour market disruptions from emerging technologies like AI are key downside risks,” the report said.
The update also highlighted the transformative potential of artificial intelligence (AI) for the region. While South Asia’s workforce largely consists of low-skill, agricultural, and manual jobs, sectors such as IT and business services are more exposed to AI-driven changes. Since the release of ChatGPT, job listings in AI-exposed roles have dropped around 20 per cent, though AI-related positions now command a wage premium of nearly 30 per cent.
To harness AI effectively, the report recommended strengthening skills among workers, improving digital connectivity and infrastructure, and facilitating labour mobility. Measures such as streamlining regulations, improving transport, expanding housing transparency, and providing safety nets for displaced workers could help accelerate job creation.
“Increasing trade openness and AI adoption could be transformative for South Asia,” said Franziska Ohnsorge, World Bank Chief Economist for South Asia. She stressed that policy steps enabling worker reallocation across sectors and regions are critical for boosting investment and employment.
The report also compared tariffs across the region: while India faces a 52 per cent effective tariff on goods exports to the US, Bangladesh and Sri Lanka confront rates of 35 per cent and 30 per cent respectively, with lower rates for Nepal, Bhutan, and Maldives. |
