South Asia growth to slow to 6.3% amid energy shocks, World Bank sees rebound ahead

The World Bank has warned that South Asia’s economic momentum will moderate in the near term, even as it retains its status as the fastest-growing region globally. 

In a post on X, the institution said growth in the region is expected to slow to 6.3% in 2026, down from an estimated 7% in 2025, primarily due to disruptions in global energy markets. However, it projected a rebound to 6.9% by 2027, signalling underlying resilience. 

Energy shocks cloud otherwise strong outlook 

According to the World Bank’s latest South Asia Economic Update, the slowdown is largely driven by the region’s heavy dependence on imported energy, which makes it particularly vulnerable to oil price spikes and supply disruptions. 

Absent these shocks — linked in part to geopolitical tensions and supply constraints — growth would have likely remained robust at around recent levels. 

The report notes that uncertainty around the forecast is “unusually elevated”, hinging on how long energy disruptions persist and how quickly global markets stabilise. 

India drives regional dominance 

South Asia continues to outperform other emerging markets largely due to India’s strong domestic demand and export resilience, which underpin the region’s overall growth story. 

India’s growth is estimated to rise to 7.6% in FY26, before easing to around 6.6% in FY27 amid external headwinds. 

Excluding India, the rest of South Asia is expected to grow at a more modest 4.1% in 2026, broadly in line with other emerging economies. 

Despite this divergence, growth across the region is still supported by strong domestic consumption, even as external pressures mount. 

Inflation, deficits, and external risks rising 

The report highlights several macroeconomic risks stemming from elevated energy prices: 

• Inflation pressures are expected to rise due to higher fuel costs and currency depreciation. 
• Current account deficits could widen as oil import bills surge. 
• Fiscal deficits may increase, especially where governments expand fuel subsidies to cushion consumers. 

Countries with weaker buffers — such as high debt or limited reserves — face greater vulnerability to prolonged shocks. 

Fragile recovery in smaller economies 

Beyond India, recovery across South Asia remains uneven: 

• Bangladesh is expected to gradually recover to 3.9% growth, though political uncertainty and banking sector weakness weigh on investment. 
• Sri Lanka’s growth will moderate to 3.6% in 2026, as post-crisis recovery slows and energy costs rise. 
• Nepal is projected to rebound to 4.2% by 2027, aided by recovery in tourism and reconstruction activity. 

The broader regional recovery in 2027 is expected to be supported by post-unrest stabilisation in several economies. 

Structural shifts and long-term opportunities 

Despite near-term headwinds, the World Bank sees potential upside: 

• Trade agreements, including India’s deals with major economies, are improving export prospects. 
• Renewable energy expansion and regional grid integration could reduce dependence on imported fuels over time. 
• Industrial policy and urban development could help accelerate job creation and sustain long-term growth. 

While global energy shocks are set to temporarily slow South Asia’s growth, the region’s strong domestic demand, reform momentum, and India-led expansion continue to anchor its global leadership in economic growth. The key risk, the World Bank cautions, is whether energy market disruptions — and the inflation and financial tightening they trigger — prove short-lived or persist longer than expected.