South Asia’s growth again surprised on the upside but is expected to slow in 2026 amid headwinds from global energy market dislocations. Over the medium-term, trade reforms in South Asian countries can unlock further growth by reducing trade barriers, especially for emerging export sectors. Across South Asia, accelerating job creation is becoming harder as job prospects erode in AI-exposed activities and long-standing subnational labor market disparities persist. To achieve policy goals, South Asian countries make proactive use of industrial policies, at about twice the rate of other EMDEs. Since 2022, about half of South Asia’s industrial policies have been directed at the manufacturing sector, particularly toward activities with larger employment, higher average wages, or larger or more productive firms. More than other EMDEs, South Asia has deployed trade-related industrial policy measures but their track record in South Asia has been mixed, with import restrictions lowering imports significantly but export support not materially raising exports. Given limited fiscal space and administrative capacity, cross-cutting measures to improve infrastructure, skilling opportunities, and the business environment remain a priority to accelerate and spread growth and jobs more evenly. These can be complemented by targeted industrial policies, prioritizing those that address market failures directly.
