South Asia’s Growth Engine Slows as Energy Costs Rise and Jobs Struggle

South Asia has once again emerged as the fastest-growing region among emerging economies, recording strong growth of about 7 percent in 2025. But this momentum is beginning to face new pressures. According to the World Bank's latest South Asia Economic Update, growth is expected to slow to around 6.3 percent in 2026. The main reason is rising global energy prices, driven by geopolitical tensions, which are pushing up costs for countries that rely heavily on imported oil and gas. This is making everyday goods more expensive, putting pressure on governments, and slowing economic activity.

India Drives Growth, Others Show Mixed Recovery

India continues to be the main engine of growth in the region. Strong consumer spending, rising investment, and expanding services like IT have helped the country maintain solid economic performance. New trade deals with the European Union and the United Kingdom are expected to boost exports further and attract investment.

However, the rest of South Asia presents a mixed picture. Bangladesh is dealing with high inflation, political uncertainty, and banking sector stress. Sri Lanka is slowly recovering from its recent economic crisis but remains fragile. Smaller economies such as Nepal, Bhutan, and the Maldives are growing with support from tourism, remittances, and hydropower, but they still face structural challenges that limit long-term progress.

Growth Without Enough Jobs

One of the biggest concerns highlighted in the report is that strong growth is not creating enough jobs. Many people are not seeing the benefits of economic expansion. This problem is becoming more serious as artificial intelligence is beginning to change how companies hire workers. In some sectors, especially services, firms are already slowing recruitment due to automation.

At the same time, there are large differences in wages and job opportunities within countries. Regions with better infrastructure, education, and connectivity are doing much better than others. These gaps make growth uneven and risk increasing inequality.

Industrial Policy: Rising Use, Mixed Results

Governments across South Asia are increasingly using industrial policy to boost growth and employment. This includes measures like tariffs, subsidies, and incentives for certain industries, especially manufacturing. In fact, South Asian countries are using such policies more than most other developing regions.

But the results have been mixed. While some policies have successfully reduced imports, efforts to increase exports have not been very effective. Also, many policies focus on manufacturing, even though most jobs are created in the services sector. This mismatch limits their impact.

The report suggests a more careful approach. Instead of broad protectionist policies, governments should focus on solving specific problems. Improving infrastructure, building skills, and making it easier for businesses to operate can be more effective than heavy intervention.

Trade Reforms and the Road Ahead

Trade reforms are seen as a major opportunity for South Asia. The region has traditionally had high trade barriers, limiting its global integration. New agreements and tariff reductions, especially in India and Sri Lanka, could change this by making imports cheaper and exports more competitive. These changes are expected to benefit households, especially poorer ones, by lowering prices and increasing income opportunities.

Looking ahead, the region faces both risks and opportunities. Rising energy costs, global financial uncertainty, climate shocks, and technological changes could slow progress. But with the right policies, South Asia can continue to grow strongly.

The key message is clear: the region does not need to choose between free markets and government intervention. Instead, it needs a balanced approach. By combining smart reforms, openness to trade, and targeted support where needed, South Asia can turn its current momentum into long-term, inclusive growth that benefits more people.