(Oct 6): The World Bank on Tuesday raised its growth forecast for India, saying strength in industry and services will help the economy weather a weaker monsoon and elevated energy prices.

The upgrade adds to a string of more optimistic assessments of the world’s fastest-growing major economy and comes a day before the Reserve Bank is expected to raise interest rates for the first time in nearly four years to contain rising inflation.

India’s economy will likely expand 7.1% in the fiscal year ending March 2027, half a percentage point more than the World Bank previously forecast. The projection, contained in its latest South Asia Development Update, is above the Reserve Bank of India’s 6.7% estimate, which is also widely expected to be upgraded on Wednesday.

“Domestic demand has been remarkably resilient,” Franziska Ohnsorge, the World Bank’s chief economist for South Asia, said in an interview. In India, that strength has been broad-based across private and government spending, investment and consumption, she said.

In its East Asia & Pacific Economic Update also released on Tuesday, the World Bank said economies in East Asia and the Pacific risk running out of firepower as they try to cushion the blow from an energy shock that’s set to persist into next year.

The region’s governments have responded more aggressively than peers elsewhere as the US-Iran war drove global prices up and they have relied more heavily on subsidies, the World Bank said.

The approach may be "unsustainable", it said, forecasting that Middle East oil exports won’t return to pre-conflict levels until mid-2027. “These measures may postpone the adjustments to behaviour required if the shock is persistent rather than temporary while also imposing fiscal costs and lowering foreign currency reserves.”

The World Bank cited Indonesia, Thailand and Vietnam, which have all taken steps to suppress retail gasoline prices and have seen their dollar war chests depleted by between 15% and 40% this year.

For now, energy risks are outweighed by what the bank calls the “AI tailwinds".

It forecasts growth of 4.5% this year in East Asia and the Pacific, revising the figure up by 0.3 percentage points from the last forecast. That’s largely due to strong investment and exports led by the artificial-intelligence boom. The outlook for 4.4% growth next year was unchanged.

A longer-lasting energy shock could put more of that resilience at risk, especially if coupled with a downturn in the AI cycle and El Niño weather disruptions, the World Bank said. Higher energy costs have already weighed on manufacturing while the surge in transport prices has hit consumer demand.

“A renewed rise in energy prices may be more damaging to economic activity than initially observed, particularly as the drag from higher inflation and tighter financial conditions grows,” it said.

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