South Asia Economic Update, October 2026

South Asia is suffering from high energy prices and has limited involvement in the AI-related supply chains that are currently underpinning global economic activity. Despite this, resilient domestic demand has supported rapid growth in the region and is expected to continue doing so. The region is projected to grow at 6.8 percent per year in 2026–27, on average. Growth in the region could be slowed by persistently elevated energy prices or damage caused by a severe El Niño. While a slowdown in AI investment and related financial turbulence would also weigh on growth in South Asia, the region is less exposed than other EMDE regions. Rising incomes, AI-driven energy demand, and recent oil price spikes make scaling up domestic generation capacity a priority; renewables offer the most cost-effective path for new capacity, and pricing and trade reforms can accelerate their deployment alongside reliable baseload sources. As adoption catches up to peers, AI can offer opportunities for productivity gains and the creation of higher-paying jobs. Tourism and agribusiness offer opportunities to create jobs with low entry barriers at scale if major investment needs and improvements in regulatory environments are addressed.

Artificial intelligence (AI) can transform South Asia’s development prospects through several channels, including by boosting the growth of labor productivity, by increasing export opportunities, and by improving the delivery of public services. AI adoption among the region’s firms is rising fast but still trails the frontier: about 23 percent of Indian firms report using AI, against 43 percent in the United States, and the gap is wider for more sophisticated uses. Global value-chain links between South Asian suppliers and U.S. customers have grown faster when suppliers and customers are in sectors that are more exposed to AI, suggesting that AI is generating new global market opportunities for the region’s firms. Prospects for AI-enhanced public service delivery are mixed: evidence suggests that AI’s success in this area depends on tailoring to local conditions. Access to computing power underpins AI, and local data center investment is one means to secure it. For most of the region, the greatest gains lie in adopting AI and adapting it to local conditions—including through small AI applications suited to low-resource settings. Realizing AI’s promise will therefore depend on policy action to secure the analog foundations for success, by strengthening workforce skills, establishing a more business-enabling environment, and improving the physical and digital infrastructure. It will also depend on complementary measures to reduce barriers to AI adoption by small firms, foster local AI innovation, and establish a clear regulatory framework that reduces uncertainty and safeguards data security and privacy.

South Asia’s demographic transition is unusually compressed: the working-age share peaks around 2034 and the region turns “aged” by 2049. Currently, aging is often neither productive nor financially secure—longer lives come with more years in poor health, older workers stay in informal, low-productivity jobs, and pension coverage is among the lowest in the world. International experience suggests that older households use a smaller share of their spending on food and clothing and a larger share for services such as health care, hospitality, and communications. Seizing the opportunities offered by an aging society requires policy actions on all fronts at once: accelerating job creation while building old-age income support and health systems before aging pressures peak.

Two forces are currently reshaping the global economy. The first is high energy prices, resulting from the conflict in the Middle East. South Asia is particularly vulnerable. It is one of the most energy-dependent regions in the world, and it relies more heavily on shipments through the Strait of Hormuz than other regions.

Over the next decade, about 280 million people will come of working age in South Asia. The region needs a robust growth engine to create jobs for these labor market entrants. International trade emerges as a promising source to boost economic growth.

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.