India Stays Among Fastest-Growing Economies Despite Slowdown Amid Middle East Tensions

According to the World Bank, India is expected to lead economic growth in South Asia, with its GDP projected to expand by around 7.6% in FY26. This strong performance positions India as the fastest-growing major economy in the region.

The report highlights that India’s GDP growth is being driven by robust domestic demand, increased investment, and steady expansion in the services sector. Government infrastructure spending and improved financial conditions have also contributed to sustaining economic momentum.

While the outlook remains positive, the World Bank notes potential risks such as global economic uncertainty, inflationary pressures, and external shocks that could impact growth. Despite these challenges, India is expected to remain a key driver of regional economic progress.

According to the World Bank, overall economic growth in South Asia is expected to slow to 6.3% in 2026, down from 7.0% in 2025. This moderation is mainly due to ongoing conflicts in the Middle East and disruptions in global energy markets. However, growth is projected to rebound to 6.9% in 2027, allowing South Asia to remain the fastest-growing region among emerging and developing economies.

The report highlights key risks, noting that the region’s heavy dependence on imported energy makes it particularly vulnerable to external shocks. Continued instability in energy markets could drive inflation higher, lead to tighter monetary policies, and reduce remittance inflows.

Inflation across much of the region remained relatively stable in early 2026 and was initially expected to rise only slightly, staying near central bank targets. However, the outlook has shifted, with concerns that rising energy prices and ongoing currency depreciation could intensify inflationary pressures if they persist.

In India, strong domestic demand, stabilizing food prices, and increasing energy costs are expected to push inflation higher during FY26 and FY27. Ajay Banga also noted that the Middle East conflict could slow global growth and raise inflation regardless of how quickly it is resolved.

Despite global challenges, South Asia’s growth outlook remains strong. Johannes Zutt emphasized the need for structural reforms across the region to sustain growth, generate employment, and strengthen resilience against external shocks.

Growth patterns vary across countries. Bangladesh is expected to grow by 3.9% in FY26 as it recovers from political instability, while Bhutan may see strong growth of 7.1% driven by hydropower projects. Sri Lanka’s growth is projected to slow to 3.6% in 2026 from 5.0% in 2025 due to rising energy costs.

The Maldives economy is forecast to slow sharply to 0.7%, impacted by tourism, fuel prices, and financial conditions. Nepal, on the other hand, is expected to grow by 2.3% in FY26, with recovery supported by easing domestic disruptions.

The World Bank also noted that while South Asian countries are adopting industrial policies at a pace similar to other emerging economies, results have been mixed. Import restrictions have significantly reduced inbound shipments, but export-oriented strategies have yet to deliver substantial gains.