India seen maintaining strong growth momentum as South Asia outlook weakens, UN report says

Global growth is projected to slow to 2.5 per cent in 2026 before edging up to 2.8 per cent in 2027—a downgrade from January forecasts and well below pre-pandemic norms. The Middle East conflict weighs heavily on the outlook, and with its duration and the pace of any recovery in energy flows highly uncertain, risks are tilted to the downside.

India is expected to remain the fastest growing major economy in South Asia in 2026 even as the region’s overall growth slows sharply amid rising global uncertainty linked to the Middle East conflict, according to the United Nations mid-year update of the World Economic Situation and Prospects 2026 report.

The report projects South Asia’s growth to moderate from 6.1 per cent in 2025 to 4.6 per cent in 2026. The 1 percentage point downward revision from the January forecast is driven primarily by a sharp contraction in the Islamic Republic of Iran.

The report said risks to the regional outlook remain tilted to the downside and depend heavily on the duration and severity of the conflict in the Middle East and its impact on oil and gas trade.

India’s economy is forecast to grow by 6.4 per cent in calendar year 2026, representing a downward revision of 0.2 percentage points from the January forecast. The report also said growth in India will continue to be supported by resilient private consumption and strong services exports.

India’s diversified energy sourcing and structural buffers are also expected to help limit the direct impact of higher crude oil prices. According to the report, these buffers include refining infrastructure, ample foreign exchange reserves and fiscal space to manage fuel prices.

Other South Asian economies remain more vulnerable to energy market disruptions. Countries with heavy dependence on Gulf Cooperation Council energy imports, including Pakistan and Sri Lanka, are expected to face sharper deterioration in their terms of trade as energy costs rise.

The report said the Middle East conflict has disrupted energy markets and key shipping routes, contributing to higher transport and production costs globally while increasing uncertainty across trade, investment and financial markets.

Iran’s economy is projected to contract by 6.4 per cent in 2026 as disruptions to oil exports and damage to energy infrastructure accelerate currency depreciation, weaken household purchasing power and drive inflation sharply higher.

Inflation in Iran is forecast to reach 68.4 per cent in 2026, though the report noted that uncertainty surrounding the country’s outlook remains exceptionally high because of the evolving nature of the conflict.

Across South Asia, consumer price inflation is projected to rise to 13.8 per cent in 2026, compared with 8.7 per cent in the January forecast, driven largely by soaring inflation in Iran.

In India, inflation is forecast at 4.9 per cent, remaining within the Reserve Bank of India’s target range. The report said the policy rate is expected to remain at 5.25 per cent amid rising inflation risks linked to higher energy prices.

The United Nations also highlighted risks from weaker remittance inflows from Gulf economies, particularly for Bangladesh and Nepal, where remittances account for a substantial share of gross domestic product.

For Bangladesh, Pakistan and Sri Lanka, rising energy costs and weaker remittance inflows are expected to place additional pressure on balance of payments positions, increasing risks of reserve drawdowns and currency depreciation during ongoing stabilisation efforts under International Monetary Fund programmes.

***