The World Bank has warned that newly imposed U.S. tariffs on Indian exports could weigh on South Asia’s economic growth in 2026. While the region remains resilient for now, supported by strong public investment, the impact of rising trade tensions is expected to emerge next year.
Growth in South Asia is forecast to decelerate from 6.6% in 2025 to 5.8% in the following year, the World Bank said in its latest South Asia Development Update released on Tuesday. The report includes India, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives. The downgrade reflects the anticipated drag from higher tariffs on Indian goods when exported to U.S. markets, as well as weaker overall export performance.
U.S. taxes Indian exports and labour-intensive industries
The slowdown is largely attributed to trade tensions between the United States and India. U.S. President Donald Trump had earlier this year announced a 50% “import tariff” on nearly half of all Indian exports, one of the most aggressive tariffs ever levied on any U.S. trade partner. The move covers trade in approximately $50 billion worth of exports, and India’s labour-intensive sectors are likely to be hit the hardest.
Sectors like textiles, gems and jewellery, leather goods, and shrimp are particularly feeling the heat. Exporters in these sectors tend to be small and medium-sized enterprises that depend heavily on the U.S. market, which accounts for approximately one-fifth of India’s total exports. About three-quarters of Indian goods sold to the United States are now being levied these tariffs.
The World Bank stated that while the Indian economy is currently bolstered by government spending and domestic demand, these tariffs will have a gradual negative impact on growth from the middle of this year.
Prime Minister Narendra Modi’s government has been making aggressive strides to alleviate the pressure. Last month, officials announced the largest tax overhaul since 2017, slashing duties on many goods — from shampoos to automobile parts — to spur domestic consumption and business sentiment.
While doing so, India has continued to increase spending on infrastructure – including roads, railways, and energy projects – in the hope of spurring economic growth and private investment. These steps are part of a larger plan to strengthen India’s growth foundation amid a global slowdown.
The World Bank has raised its projection for India’s growth in the current fiscal year (through March 2026) to 6.5%, from 6.3%. However, it reduced its forecast for the next fiscal year to 6.3%, partly due to the expected drag from tariffs and softer global demand.
South Asia’s regional ripple effects
India’s economic slide seems certain to wash across its neighbours as well. As the largest economy in South Asia, India accounts for more than 75% of the GDP in this subregion; as such, trade and investment linkages carry significant implications for countries such as Bangladesh, Nepal, and Sri Lanka.
Bangladesh, for example, whose textile and garment exports end up in goods sold around the world, may see less demand for the intermediate goods it ships to India. Sri Lanka, which is dealing with a financial crisis of its own, heavily relies on tourism and trade links with India, which could fade if growth outpaces the need for exports. Remittances and export earnings could also fall for Nepal and Bhutan, destination countries with economies closely connected to India’s.
The World Bank report stated that the slowdown in Indian exports would have a ripple effect throughout the region, affecting its industrial supply chains, transportation, and trade services.
Trade diversification for South Asia is a key long-term lesson to draw from its current situation. Economists advise, among other things, increasing exports to emerging markets in Africa, Southeast Asia, and Latin America, as well as investing more in value-added industries, to reduce dependence on just one or two key trade partners.
The World Bank also highlighted the importance of regional cooperation, including in technology, green energy, and digital trade. Greater regional integration of South Asian economies could help reduce external shocks and open new markets.
India’s Finance Minister, Nirmala Sitharaman, stated that the government would continue to increase its capital spending and support industries through credit and innovation.
