South Asia Development Update October 2025

South Asia grew more quickly than expected in 2025, but is set to slow significantly in 2026. This deceleration could be worsened by spillovers from a persistent global economic slowdown, labor market disruptions from AI, social unrest, or geopolitical tensions. Over the longer term, new technologies such as AI and more open trade regimes could catalyze renewed growth momentum by encouraging private investment and productivity. Policymakers can foster both growth and job creation by enhancing the flexibility of their economies, improving connectivity, encouraging upskilling of the workforce, and providing an appropriate safety net.

The predominance of low-skill, agricultural, and manual jobs in South Asia means the region is only moderately exposed to AI. Productivity gains could be substantial in the 15 percent of South Asian jobs with strong complementarities with AI. Jobs requiring AI skills command a wage premium of nearly 30 percent. Moderately educated, young workers are the most vulnerable to job displacement. The introduction of generative AI reduced monthly job listings by around 20 percent for the most exposed white-collar occupations. South Asia could maximize the benefits of AI by raising the share of skilled workers and ensuring reliable electricity and fast internet access. Improving infrastructure and facilitating labor mobility can help maximize AI’s benefits while minimizing labor market disruptions.

Carefully sequenced trade reforms could encourage private investment and create jobs for South Asia’s growing working-age population. Historically, major trade reforms have typically coincided with periods of significantly faster aggregate employment and output growth. However, higher-skilled and younger workers, and those in manufacturing, have benefited more than others. Ambitious tariff cuts in South Asia, too, especially in conjunction with broader free trade agreements, would particularly benefit younger and higher-skilled workers and those in manufacturing, who tend to work in trade-oriented sectors that are currently held back by elevated tariffs on inputs. Removing obstacles to the reallocation of workers across firms, sectors, and locations would help unlock gains for more workers.

Ambitious trade reforms in South Asia could deliver substantial gains in exports and incomes, in part as a result of workers reallocating toward more productive firms, sectors, and locations. High switching costs for workers could diminish some of the potential gains. Even modest improvements in labor mobility could substantially increase the income gains from trade reform.

Most South Asian countries derive 4–19 percent of their government revenues, or 0.7–3.7 percent of GDP, from trade. Past episodes of major tariff cuts were, on average, accompanied by a small decline in trade revenue of less than 0.1 percentage point of GDP. Total tax revenue-to-GDP ratios stayed broadly flat during these reforms, as trade tax revenue losses were offset by gains in other tax revenues, especially from consumption taxes. +ese tariff reductions rarely involved tax rate increases, and typically relied on base broadening or better tax administration.

The rapid development of artificial intelligence (AI) is transforming the global economy and reshaping labor markets. What does this mean for the South Asia region? South Asia’s workforce has limited exposure to changes caused by the adoption of AI owing to the predominance of low-skill, agricultural, and manual jobs. But moderately educated, young workers, especially in sectors such as business services and information technology, are vulnerable.

South Asia remains the fastest growing region in the world with stronger than expected growth in 2025. But this momentum is expected to ease, with a significant slowdown expected in 2026. There are several downside risks that might affect the region’s outlook, including spillovers from a weaker-than-anticipated global economy and uncertainty around trade policy as well as recurring social unrest in the region.

There are two economies in South Asia—a less productive traditional one and a dynamic modern one. Most people work in the first one, but South Asia will better achieve its ambitions if some shift to the second one. Lowering tariffs and leveraging artificial intelligence can help.