South Asia is projected to remain the fastest growing emerging market and developing economy region, but its economic prospects are dimming amidst a broader global slowdown. 

Heightened trade tensions and policy uncertainty are expected to drive global growth to its slowest pace since 2008, outside of outright global recessions, according to the World Bank’s latest Global Economic Prospects report. This global turmoil has led to growth forecasts being cut in nearly 70 percent of all economies, across all regions and income groups.

Global growth is projected to slow to 2.3 percent in 2025, almost half a percentage point lower than anticipated at the start of the year. While a global recession is not expected, if current forecasts materialize, the average global growth in the first seven years of the 2020s will be the slowest of any decade since the 1960s.

“Outside of Asia, the developing world is becoming a development-free zone,” said Indermit Gill, World Bank Group’s Chief Economist and Senior Vice President for Development Economics. Gill highlighted that growth in developing economies has steadily declined over three decades, from 6 percent annually in the 2000s to less than 4 percent in the 2020s, mirroring a similar decline in global trade growth. Investment growth has also slowed, even as debt has climbed to record levels.

Growth is expected to slow in nearly 60 percent of all developing economies this year, averaging 3.8 percent in 2025 before edging up to 3.9 percent over 2026 and 2027. This is more than a percentage point lower than the average of the 2010s. Low-income countries are expected to see 5.3 percent growth this year, a 0.4 percentage point downgrade from earlier forecasts. Global inflation, projected at an average of 2.9 percent in 2025, remains above pre-pandemic levels due to tariff increases and tight labor markets.

For developing economies, slowing growth will impede efforts to spur job creation, reduce extreme poverty, and close per capita income gaps with advanced economies. Per capita income growth in developing economies is projected at 2.9 percent in 2025, 1.1 percentage points below the 2000-2019 average. It could take about two decades for developing economies, excluding China, to return to their pre-pandemic economic output trajectory, even if they sustain a 4 percent GDP growth rate.

South Asia’s Specific Outlook:

Growth in South Asia is expected to moderate to 5.8 percent in 2025, then average 6.2 percent in 2026-27. This pace remains below the pre-pandemic average and limits the scope for rapid job expansion. The forecast for South Asia growth has been downgraded by 0.4 percentage points relative to previous projections.

Regional per capita income growth is anticipated to average 5 percent over the forecast period. However, excluding India, this pace is projected to be far more tepid, implying weak progress in poverty reduction and per capita income catch-up gains.

Key Risks to South Asia’s Growth:

Risks to the growth outlook in South Asia are tilted to the downside. The most pressing risks include intensified trade barriers and heightened global policy uncertainty. Additional trade barriers, particularly by major trading partners like the United States and Europe, could reduce global trade growth and external demand, lowering regional growth prospects. Heightened global economic policy uncertainty could also weigh on business and investor confidence, reducing investment, including foreign investment.

Other downside risks include a tightening of global financial conditions, driven by unexpectedly higher global inflation or a decline in global risk appetite. This could lead to higher interest rates, worsening debt-servicing dynamics, and capital outflows from the region, especially from economies with large macroeconomic vulnerabilities such as Maldives and Pakistan.

Instability in the financial sector, surges in violence and social unrest, further declines in official aid, and extreme weather events also pose significant threats.

Country-Specific Highlights:

India: India is projected to maintain the fastest growth rate among the world’s largest economies, at 6.3 percent in FY2025/26 (April 2025 to March 2026). However, the forecast for India’s growth in FY2025/26 has been downgraded by 0.4 percentage points relative to January projections, with exports dampened by weaker activity in key trading partners and rising global trade barriers. Investment growth is expected to slow, primarily reflecting a surge in global policy uncertainty.

Pakistan: Growth is expected to strengthen to 3.1 percent in FY2025/26 and 3.4 percent in FY2026/27, with industrial and services activity firming as inflation is contained and borrowing costs decline. However, projected growth will remain subdued due to still-high real interest rates and fiscal consolidation. Pakistan’s merchandise trade deficit widened in April 2025, partly due to increases in U.S. import tariff rates.

Bangladesh: Growth is projected to increase to 4.9 percent in FY2025/26 and 5.7 percent in FY2026/27. Investment is expected to rebound, predicated on improving political stability and successful implementation of reforms.

Sri Lanka: Growth is forecast to decelerate to 3.5 percent this year, reflecting scarring effects of the crisis, structural impediments, and heightened global economic uncertainty.

Maldives: GDP is expected to expand by 5.7 percent this year and then moderate to 5.3 percent in 2026, partly reflecting global trade uncertainty and weakening external demand. Forecasts for Maldives have been upgraded due to stronger tourism sector performance.

Nepal and Bhutan: Growth is anticipated to strengthen over the forecast period. Nepal’s growth is expected to rise to 5.2 percent in FY2025/26 and 5.5 percent in the following fiscal year. Bhutan’s growth is projected to increase to 7.6 percent in FY2025/26, mainly reflecting the commissioning of a large hydropower plant.

Recommendations for Developing Economies:

Given rising trade barriers, the report argues that developing economies should seek broader liberalization by pursuing strategic trade and investment partnerships and diversifying trade, including through regional agreements. Policymakers should focus on mobilizing domestic revenues, prioritizing fiscal spending for the most vulnerable, and strengthening fiscal frameworks due to limited government resources and rising development needs. 

To accelerate economic growth, countries need to improve business climates and promote productive employment by equipping workers with necessary skills and creating efficient labor markets. Global collaboration, including multilateral interventions and concessional financing, is crucial for supporting the most vulnerable developing economies.

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