Growth in South Asia is expected to remain strong in 2025, with a projected rate of 6.6 percent, according to the World Bank’s latest South Asia Development Update. However, the report forecasts a slowdown to 5.8 percent in 2026, revising its previous estimate downward by 0.6 percentage points. The outlook identifies risks such as global economic headwinds, uncertain trade policies, socio-political unrest in the region, and labor market disruptions from new technologies like artificial intelligence (AI).
“South Asia has enormous economic potential and is still the fastest growing region in the world. But countries need to proactively address risks to growth,” said Johannes Zutt, World Bank Vice President for South Asia. “Countries can boost productivity, spur private investment, and create jobs for the region’s rapidly expanding workforce by maximizing the benefits of AI and lowering trade barriers, especially for intermediate goods.”
The report highlights that South Asian countries are among those least open to international trade and finance. High tariffs in the region protect sectors where employment opportunities are declining and hinder manufacturing by imposing tariffs on intermediate goods at rates more than double those of other emerging markets.
In contrast, sectors with lower tariffs—such as services—have contributed about three-quarters of employment growth over the past decade. The report suggests that reducing tariffs in a careful sequence, particularly within broader free trade agreements, could increase private investment and competitiveness while creating more jobs.
The rapid development of AI is changing economies worldwide and reshaping labor markets. In South Asia, most workers have limited exposure to AI due to the dominance of low-skill or manual jobs. However, younger workers with moderate education levels in business services and IT may be more vulnerable to disruption from AI adoption. Since ChatGPT was introduced, job listings have dropped by around 20 percent for roles most exposed to automation by AI compared to other occupations.
Despite these challenges, AI offers potential productivity gains for sectors where technology can complement human work. Demand for AI skills is rising quickly in South Asia, with such positions offering nearly a 30 percent wage premium over other professional roles.
To support job creation and economic growth, the report recommends measures such as reforming regulations that limit firm size expansion, improving transport and digital infrastructure, increasing transparency in housing searches, investing in worker upskilling and job matching programs, and providing safety nets for those affected by technological change.
“Increasing trade openness and growing adoption of AI could be transformative for South Asia,” said Franziska Ohnsorge, World Bank Chief Economist for South Asia. “Policy measures to facilitate the reallocation of workers across firms, activities, and locations can help channel resources to productive sectors and are critical for boosting investment and job creation in the region.”
Alongside this regional outlook, updated country reports for Bangladesh and Sri Lanka were also released today.