World Bank raises India FY27 growth forecast to 7.1%, sees AI as growth driver

The World Bank has raised India's FY27 growth forecast to 7.1% in its October South Asia Economic Update. The report says AI could shape the next phase of growth, even as weak agriculture remains a near-term risk.

In Short

• World Bank raises India growth forecast for 2026-27 to 7.1% from 6.6%
• AI adoption rising but Indian firms lag US in use and sophistication
• Digital infrastructure and education seen as key to boosting AI uptake

The World Bank has raised its growth forecast for India for 2026-27 to 7.1% from 6.6% estimated in June, citing strong domestic demand and continued momentum in industry and services even as weakness in agriculture remains a near-term risk.

The upgrade based on the World Bank's October South Asia Economic Update, amounts to a 50-basis-point increase in the forecast. The World Bank expects India's economy to grow 7.2% in FY28, while noting that India expanded 7.8% in FY26, slightly above its earlier estimate.

The World Bank's latest assessment also puts artificial intelligence at the centre of India's longer-term growth prospects. While AI adoption among Indian companies is rising rapidly, the report found that Indian firms still lag their US counterparts significantly in both the use and sophistication of AI.

WHY THE WORLD BANK RAISED INDIA'S GROWTH FORECAST

The World Bank said strong domestic demand, along with continued momentum in industrial and services activity, is expected to support India's growth in FY27.

It also highlighted several structural factors that could support growth over the longer term. These include consolidation of labour codes, GST reforms, tariff rationalisation, the Insolvency Act and investment in both physical and digital infrastructure.

The stronger outlook comes despite weakness in agriculture, which the World Bank identified as the biggest near-term risk to India's growth forecast.

INDIA DRIVES SOUTH ASIA'S GROWTH

India is expected to remain the main driver of growth in South Asia.

The World Bank has projected South Asia's economy to grow 6.9% in 2026 and 6.7% in 2027. However, growth in the region excluding India is expected to be considerably lower at 3.6% in 2026 and 3.8% in 2027.

This means India's performance accounts for a substantial part of the region's overall growth outlook.

AI COULD POWER INDIA'S NEXT PHASE OF GROWTH

Beyond the immediate growth outlook, the World Bank report places considerable emphasis on artificial intelligence as a potential source of productivity gains for India.

A new World Bank survey of formal firms found that 23.4% of Indian companies use some form of AI, compared with 42.7% of firms in the US.

The gap becomes much wider when the sophistication of AI adoption is taken into account. India's score on the World Bank's AI Adoption Index stands at 0.27, compared with 0.85 for the US.

There is also a significant difference in the number of companies actually paying for AI tools. Only 3.5% of Indian firms reported paying for AI software or subscriptions, compared with 23.1% of US firms.

However, the World Bank noted that Indian companies are catching up quickly.

AI use among Indian companies was close to zero in mid-2024 but accelerated sharply from late 2024 onwards. At the same time, the pace of AI adoption in the US subsequently moderated.

DIGITAL INFRASTRUCTURE, SKILLS SEEN AS BIGGEST BOTTLENECKS

Indian companies themselves identified infrastructure and education as two of the biggest factors that could help accelerate AI adoption.

Around 72% of Indian firms surveyed said better digital infrastructure would increase their use of AI, while 55% pointed to improvements in tertiary education.

The World Bank also found that workforce skill intensity was among the few characteristics of firms significantly associated with greater AI adoption.

However, expectations of productivity gains from AI remain cautious.

Almost three-fourths of Indian firms expect zero or near-zero productivity gains from faster AI development over the next three years. Only around 8% expect gains of 20% or more.

This suggests that while Indian businesses are increasingly experimenting with AI, widespread adoption has not yet translated into equally strong expectations of near-term productivity gains.

AI COULD CREATE NEW EXPORT OPPORTUNITIES

The World Bank report also offers a more positive assessment of how AI could affect India's services exports.

It challenges the concern that generative AI will mainly encourage companies in advanced economies to bring outsourced work back in-house.

According to the report, global value-chain links between US customers and South Asian suppliers have grown fastest in sectors where both sides have high exposure to AI.

A one-standard-deviation increase in a US company's AI exposure was associated with a 27.5% larger post-ChatGPT increase in its customer and partner relationships with South Asian firms.

The effect was even stronger when the South Asian company was itself highly exposed to AI.

The World Bank said this suggests AI could create new, higher-value work alongside the services already provided by South Asian companies.

At the same time, routine business-process outsourcing work could face greater automation risks as AI capabilities improve.

MONSOON DEFICIT REMAINS A RISK

Despite the stronger overall growth forecast, agriculture remains a weak spot.

The World Bank said India experienced its fourth-driest June-August period since 1960. A larger-than-expected monsoon deficit could weigh on agricultural output and rural demand.

A weak monsoon could also add to food inflation, although stronger activity in other parts of the economy is expected to cushion the impact on overall growth.

The agriculture risk therefore remains an important variable for the FY27 outlook, particularly because weaker farm output can affect rural consumption as well as food prices.

The World Bank's latest forecast paints a picture of an economy being supported by domestic demand, industry and services in the near term, while digital infrastructure, reforms and AI could shape its longer-term growth potential.

The 7.1% FY27 forecast is 50 basis points higher than the 6.6% estimate released in June. The World Bank expects growth to remain strong at 7.2% in FY28.

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