South Asia’s Growth Momentum Faces Fragile Economic Foundations

Regional growth is set to reach 6.9 percent in 2026 and 6.7 percent in 2027, sustained by resilient remittance inflows and steady domestic demand. However, this performance masks a growing vulnerability to external shocks. As the world’s most energy-dependent emerging market, the region faces persistent inflationary pressure from fuel costs and the strain of subsidizing consumer prices. With government coffers thinned by previous interventions, any prolonged disruption in energy markets risks eroding the purchasing power that currently anchors the regional economy.

National trajectories remain sharply divided. India maintains a strong 7.1 percent growth forecast, bolstered by industrial activity, while Bangladesh faces a significant slowdown to 3.4 percent amid banking-sector stress and energy constraints. These disparities complicate regional policy, as countries with narrower export bases and weaker fiscal positions struggle to absorb shocks that faster-growing neighbors can temporarily weather.

Beyond immediate economic pressures, the region faces a narrowing window to capitalize on its youthful population. With the working-age share peaking by 2034, governments must shift labor from low-productivity agriculture into more dynamic sectors. Artificial intelligence offers a potential path to higher output, yet current adoption rates lag significantly behind global leaders. With only 23 percent of formal firms in India utilizing AI, the technology risks widening inequality rather than bridging it. Success will depend less on competing at the global technological frontier and more on building the basic infrastructure—reliable power, connectivity, and workforce skills—necessary to adapt existing tools to local challenges.