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 US tariffs and the advent of Artificial Intelligence (AI) are creating fresh uncertainties for South Asia’s economic growth, the World Bank has said in its latest South Asia Development Update.

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

“For 2026, the forecast has been downgraded, as some of these effects unwind and India continues to face higher-than-expected tariffs on goods exports to the United States,” said the report released on Tuesday.

India is expected to remain the world’s fastest- growing major economy, underpinned by continued strength in consumption growth, it further said, adding that domestic conditions, particularly agricultural output and rural wage growth, have been better than expected. “The government’s reforms to the Goods and Services Tax (GST)—reducing the number of tax brackets and simplifying compliance—are expected to support activity,” it further noted.

However, it highlighted that India had been expected to face lower US tariffs than its competitors in April but as of the end of August it faces considerably higher tariffs. “Almost one-fifth of India’s goods exports went to the United States in 2024, equivalent to about 2% of GDP,” it pointed out, adding that the forecast for FY27 has been downgraded because of the imposition of a 50% tariff on about three-quarters of India’s goods exports to the United States.

Apart from the 50% tariffs on India, the US has imposed a tariff of 20% on Bangladesh and Sri Lanka and 10% on Nepal, Bhutan ad Maldives. “As a result of these increases, most goods exported from Bangladesh to the United States face a tariff totaling 35%; from Sri Lanka, 30%; and from India, 52%,” said the report, adding that some categories of goods are subject to product-specific tariffs that are currently generally lower than the country- specific tariffs, but may increase in the future.

“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,” she further said.

The report also suggested that South Asia could strengthen the foundations for maximizing the benefits of AI by raising the share of skilled workers and ensuring reliable electricity, as well as consistent and fast internet access. “Improving infrastructure and facilitating labour mobility can help maximise AI’s benefits while minimising labour market disruptions,” it said.

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

South Asia’s workforce has limited exposure to AI adoption due to the predominance of low-skill, agricultural and manual jobs, it said, while cautioning that moderately educated, young workers, especially in sectors such as business services and information technology, are vulnerable. “Since the release of ChatGPT, job listings have fallen by around 20% in jobs most exposed to, and most replaceable by AI relative to other occupations,” the report said.

Its recommendations include steps to help accelerate job creation by streamlining size-dependent regulations that discourage firms’ growth, better transport and digital connectivity, more transparent housing search options, upskilling and job matching, as well as providing safety nets for affected workers.