World Bank raises India’s FY27 GDP growth forecast to 7.1%

The World Bank has increased its forecast for India's GDP growth in the current fiscal year to 7.1%, a half percentage point rise from the previous estimate. This strong growth is expected to propel the South Asia region as well, with GDP anticipated to expand by 6.9% in 2026, up from the earlier 6.3% projection. However, India's contribution to the region's growth is set to decrease to 3.6%, down from 4.1% previously, primarily due to a significant reduction in Bangladesh's growth forecast.

The World Bank attributes India's positive growth prospects to the momentum in key sectors like industry and services, citing reforms such as labor code consolidation, GST reforms, tariff rationalization, bankruptcy and insolvency act implementation, and infrastructure investments as factors contributing to sustained growth potential.

The bank also anticipates that strength in the rest of the economy will compensate for slower agricultural growth, which may be affected by sub-par monsoons and rising food inflation due to higher energy prices. Looking ahead to 2027-28, the World Bank estimates Indian GDP growth to be 7.2%. The forecast adjustment comes just ahead of the Reserve Bank of India's (RBI) decision on interest rates, with economists expecting the Monetary Policy Committee (MPC) to raise the repo rate by 25 basis points to 5.5%.

The World Bank's analysis also highlights demographic changes in South Asia, noting that the region's working-age population growth has slowed from 2.2% annually between 1960 and 2023 to 0.6% over the next 25 years. This demographic shift is expected to pose challenges for policymakers, particularly as the majority of South Asian countries will undergo this transition at relatively low income levels compared to other emerging economies.

Additionally, the bank warns that while AI adoption offers potential benefits like increased labor productivity and expanded export opportunities, only 23% of Indian firms currently use AI, compared to 43% in the US. Moreover, the World Bank's AI Adoption Index reveals that only 0.27 of India's firms report using advanced AI technologies, significantly lower than the US' figure of 0.85.

Despite late adoption, Indian companies have been rapidly catching up with their American counterparts. However, the report warns that AI's potential gains are unevenly distributed, with nearly 75% of firms expecting minimal productivity benefits, and 15% anticipating a revenue per worker decrease of up to 10% due to reduced market share in the face of rapid AI deployment.