Developing economies set for weakest growth since 2020, India steady at 6.7% in FY26: World Bank

Developing economies—which fuel 60 percent of global growth—are projected to finish the first quarter of the 21st century with the weakest long-term growth outlook since 2000, according to the World Bank’s latest Global Economic Prospects report.

The global economy is on a path of stabilisation, with projected growth of 2.7% in 2025 and 2026, according to the World Bank’s latest Global Economic Prospects report. However, developing economies—the backbone of global growth—are poised for a tougher road ahead, marked by their weakest long-term growth outlook since the start of the century.

In India, growth is projected to remain steady, at 6.7 percent a year for the two fiscal years beginning in April 2025. The services sector is expected to enjoy sustained expansion, and manufacturing activity will strengthen, supported by government initiatives to improve the business environment. Investment growth is projected to be steady, with moderating public investment offset by rising private investment.

Despite accounting for 60% of global growth and nearly 45% of global GDP, developing economies are expected to grow at a steady but underwhelming 4% annually over the next two years, World Bank said. This is a notable decline from the pre-pandemic era and insufficient to close the income gap with advanced economies or achieve critical poverty reduction and development goals, the report added.

“The next 25 years will be a tougher slog for developing economies than the last 25,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President for Development Economics. “Most of the forces that once aided their rise have dissipated. In their place have come daunting headwinds: high debt burdens, weak investment and productivity growth, and the rising costs of climate change. In the coming years, developing economies will need a new playbook that emphasizes domestic reforms to quicken private investment, deepen trade relations, and promote more efficient use of capital, talent and energy.”

The World Bank said this analysis is its first systematic assessment of the performance of developing economies in the first quarter of the 21st century. It report found that, during the first decade, developing economies grew at the fastest clip since the 1970s. However, growth momentum slowed after the 2008-09 Global Financial Crisis, with foreign direct investment (FDI) into these economies halving as a share of GDP since the early 2000s.

Trade restrictions have also surged, with new global trade barriers in 2024 reaching five times the annual average from 2010 to 2019. Consequently, economic growth in developing economies has decelerated sharply, falling from an average of 5.9% in the 2000s to 3.5% in the 2020s.

“Since 2014, with the exception of China and India, the average per capita growth rates of income in developing economies have been half a percentage point lower than that in wealthy economies, widening the rich-poor gap,” said the report.

Developing economies have become more interconnected, with over 40% of their exports now destined for other developing economies—double the share in 2000, the report added. They have also emerged as vital sources of global remittances, capital flows, and development aid, accounting for 40% of global remittances between 2019 and 2023.

These economies wield growing influence on global development outcomes. For example, a 1 percentage point increase in GDP growth in China, India, or Brazil results in a cumulative 2% boost to GDP in other developing economies over three years, the report said. Still, the impact remains less pronounced than that of growth in the United States, the euro area, or Japan.

“As the first quarter of this century progressed, EMDE per capita income gains relative to advanced economies diminished. Per capita GDP in the two largest EMDEs, China and India, has continued to move closer to advanced-economy levels, but at a slowing pace. Excluding China and India, per capita GDP in EMDEs peaked as a share of advanced-economy incomes at nearly 11 percent in 2013. This share has not been regained over a decade later, and the near-term outlook does not portend well for income catch-up,” the report said.

“In a world shaped by policy uncertainty and trade tensions, developing economies will need bold and far-reaching policies to seize untapped opportunities for cross-border cooperation,” said M. Ayhan Kose, Deputy Chief Economist and Director of the Prospects Group at the World Bank. “A good start would be to pursue strategic trade and investment partnerships with the rapidly expanding markets of other developing nations. Modernizing transportation infrastructure and standardizing customs processes are critical steps to cut unnecessary expenses and foster greater trade efficiency. Finally, sound macroeconomic policies at home will fortify their capacity to navigate the uncertainties of the global outlook.”

Per capita income growth in EMDEs is projected to remain below its 2000-19 average over 2025- 26, at 3.1 percent, the World Bank said. A longer-term slowdown was already well underway prior to the pandemic, as the boost ,from international integration and domestic reforms in the 2000s faded in many EMDEs Excluding China and India—the main sources of EMDE income convergence this century—progress in closing the per capita income gap with advanced economies stalled in the mid-2010s. This trend is so far continuing in the 2020s, with many LICs and FCS falling further behind, it said. Even assuming average 2010s growth rates—which were somewhat stronger than those of recent years—less than one-quarter of low income countries appear on course to graduate to middle-income by 2050, down from close to two-thirds of eligible countries in the last 25 years, said the World Bank.

The report highlights several risks that could weigh on growth prospects for developing economies in the short term. Persistent inflation, rising trade tensions, and high global policy uncertainty could dampen investor confidence and limit financing flows. However, favourable developments, such as additional stimulus measures in China or robust consumer spending in the United States, could mitigate these risks and provide a growth boost.

The report identifies actionable steps for developing economies to improve their growth trajectories. These include addressing infrastructure deficits, accelerating the climate transition, and enhancing human capital to spur productivity.

“With the right policies, developing economies can transform headwinds into opportunities,” the report notes. “Strengthening global trade governance, with support from multilateral institutions, is critical to fostering resilience and sustainable growth.”

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