World Bank raises India’s GDP growth forecast to 6.5% for FY26, lowers it to 6.3% for FY27 due to US tariffs

High tariffs in the United States and the emergence of artificial intelligence (AI) are creating fresh uncertainties for South Asia’s economic growth, the World Bank said in its latest South Asia Development Update.

It raised India’s GDP forecast to 6.5% for FY26 from the previous 6.3%, but forecast growth in South Asia to 5.8% in 2026 from 6.6% in 2025. India is seen to grow at 6.3% in FY27 on the back of 50% growth from the US.

“For 2026, projections have been lowered, as some of these impacts relax and India continues to face higher-than-expected tariffs on merchandise exports to the US,” the report released on Tuesday said.

India is expected to remain the world’s fastest growing major economy, supported by continued strength in consumption growth, he said, adding that domestic conditions, especially agricultural production and rural wage growth, were better than expected. “The government’s Goods and Services Tax (GST) reforms – which ease the number of tax brackets and simplify compliance – are expected to support activity.”

However, he highlighted that India is expected to face a lower US tariff than its rivals in April, but from the end of August faces a much higher tariff. “Nearly one-fifth of India’s merchandise exports went to the US in 2024, equivalent to about 2% of GDP,” she noted, noting that forecasts for FY27 had been lowered due to the imposition of a 50% tariff on about three-quarters of India’s merchandise boxes.

Apart from the 50% tariffs on India, the US imposed tariffs of 20% on Bangladesh, Sri Lanka and 10% on Maldives, Nepal, Bhutan. “As a result of these increases, most goods exported from Bangladesh to the United States face tariffs of 35%; from Sri Lanka, 30%; and from India, 52%,” the report said.

“Increasing trade openness and adoption of AI could be transformative for South Asia,” said Franziska Onsorge, chief economist for South Asia. She further said: “Policy measures to facilitate the allocation of workers across firms, activities and locations can help direct resources to productive sectors and are crucial to boosting investment and job creation in the region.”

The report also noted that South Asia could strengthen the foundations to increase the benefits of AI by raising the share of skilled workers and ensuring reliable electricity, as well as access to fast and fast internet. “Improving infrastructure and facilitating labor mobility can help maximize the benefits of AI while reducing labor market disruptions.”

He noted that across South Asia, about 22% of jobs are exposed to AI, as measured by the overlap between skills required in the occupation and AI capabilities.

She said the South Asian workforce limits exposure to AI adoption due to the predominance of low-skilled, agricultural and manual jobs, while warning that young, educated workers, especially in sectors such as business services and IT, are vulnerable. “Since the release of ChatGPT, job listings have declined by 20% in the jobs most exposed to them, most of which are substitutable by AI relative to other occupations,” the report said.

Its recommendations include steps to help accelerate job creation by simplifying size-based regulations that discourage business growth, improved transportation and digital connectivity, more transparent housing search options, and lift at work, as well as providing safety nets for affected workers.