South Asia Economic Update April 2026

South Asia’s economic growth is expected to slow to 6.3 percent in 2026 amid dislocations in global energy markets. South Asia remains the fastest-growing EMDE region thanks to India. South Asia’s growth prospects could be dampened by more persistent global energy market dislocations or a bout of global financial turbulence transmitted to the region and magnified by domestic weaknesses. Accelerating growth and job creation remains a major challenge for South Asian policymakers. Carefully designed industrial policy can turn cities into powerful growth accelerators or promote tourism to spread growth more broadly.

During 2022–25, South Asian countries implemented twice as many industrial policies as the average EMDE. About one-half of these policies targeted manufacturing and, within manufacturing, policies were disproportionately aimed at sectors with larger employment, higher wages, or larger or more productive firms. More than in other EMDEs, industrial policies took the shape of trade-related measures, with mixed results: In South Asia, import-restricting policies were followed by significant declines in imports, but export-promoting measures produced no significant gains in exports. Given limited fiscal space and regulatory capacity, South Asia’s priority is broad-based development policies, while industrial policy can focus on addressing market failures.

India’s free trade agreements with the European Union and the United Kingdom as well as Sri Lanka’s planned phase-out of para-tariffs are expected to remove trade barriers, especially for emerging export sectors. The reforms are anticipated to result in broad-based consumption and real income gains for households across the entire income distribution. The largest benefits are expected for consumers of manufactured goods, especially among rural households.

AI is reshaping firms and jobs in South Asia, with its adoption proceeding rapidly since 2022. Higher AI exposure is associated with slower hiring, especially among multinational affiliates. Some of these declines appear to be related to spillovers from foreign AI adoption, as South Asian firms supplying goods and services to more AI-exposed foreign companies have also experienced slower hiring. Value chain upgrading through faster AI adoption and skills development will be critical for firms to remain competitive.

South Asia has some of the largest and some of the smallest within-country wage differentials by the standards of EMDEs. In South Asia’s larger countries, worker characteristics account for about one-fifth of these subnational wage differentials. South Asia’s remaining wage premiums, after controlling for worker characteristics, are higher in regions with better transport connectivity, more skilled workforces, larger firms, and more service sector activity. Wage premiums appear to be persistent and self-reinforcing. While such regional wage persistence may warrant place-based or industrial policies, South Asia’s experience with these policies has been mixed.

Global thinking on growth is shifting from a model led by private-sector dynamism toward greater use of industrial policy to steer economic outcomes. However, South Asia’s strong performance has largely been driven by market-oriented reforms, suggesting that while targeted industrial policy can play a role, governments should focus on enabling—not replacing—the private sector.

South Asia struggles to create enough jobs for its growing population. Employment ratios—employment in percent of the population aged 15 or older—in South Asia, particularly in the non-agricultural sector and for women, are among the lowest worldwide. At the same time, South Asian countries remain among the most closed to international trade, in part reflecting high tariffs and non-tariff barriers.

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.

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.