AI, trade deals can accelerate India's growth, says World Bank economist

AI, trade could lift growth

India’s growth can accelerate if the country capitalises on productivity gains from artificial intelligence (AI) and expands market access through trade agreements, World Bank's chief economist for South Asia Franziska Ohnsorge has told Moneycontrol.

“Trade agreements will just create a whole new set of markets that could lift potential growth simply because there is a bigger market to integrate into,” Ohnsorge said. “Additionally, AI could also deliver a productivity shock, which could make everyone more productive, leading to higher potential growth.”

The World Bank on October 7 raised India’s FY26 growth forecast to 6.5 percent from 6.3 percent but lowered the projection for the next fiscal to 6.3 percent from 6.5 percent.

“We expect a slowdown from 6.5 percent this year to 6.3 percent next year, and that slowdown is in part because of higher US tariffs,” Ohnsorge said. India would nevertheless remain the fastest-growing major economy globally, she said.

Public investment driving growth

The upward revision in India’s growth forecast for FY26 reflected the recent surge in public investment, Ohnsorge said.

“The main reason we raised our forecast this year was really just a reflection of the recent data release that took us by surprise — it was surprisingly strong in good measure because of public investment,” she said.

Sustaining this momentum would require a careful fiscal balancing act. “The optimal size of public investment depends on the fiscal deficit, financing, and investment needs — it has to be carefully calibrated against these considerations,” she said.

Private investment needs trade push

While public spending has been robust, private investment growth remains uneven.

“Private investment growth in India is still higher than in the average emerging market and developing economy — it’s weak by Indian standards, not by international standards,” Ohnsorge said.

India underperforms significant weakness in attracting foreign direct investment (FDI), noting its net FDI remains in the lowest global quartile.

Where India underperforms sharply is in foreign direct investment (FDI), which remains among the lowest quartile globally, she said.

“FDI usually comes with tradeables, integrated into supply chains. To increase it, India should reduce tariffs, cut non-tariff barriers, and do as many trade deals as possible — with large and deep counterparts — so that you really unlock supply chains,” the economist said.

She also pointed out that India’s trade openness is among the lowest in emerging markets.

“If you take Mexico or Vietnam, they have trade agreements covering about 50 percent of global GDP. For India, that number is closer to 12 percent even after the UK deal. So, any new trade agreement with a large economy — whether the US, EU, Canada or Australia —would be a big win.”

Manufacturing, reforms and logistics bottlenecks

On whether India’s manufacturing ambitions can replicate China’s job-rich expansion, Ohnsorge was cautious. “It’s going to be harder because global trade isn’t booming the way it used to,” she said. “But India’s export-to-GDP ratio is still among the lowest in emerging markets, so even a modest expansion could bring substantial gains.”

She underlined that India’s small and fragmented firm structure, where many enterprises remain informal and fail to scale, needs structural reform.

“Lots of small firms are founded and never exit or consolidate. Removing obstacles to firm growth is essential. Deregulation efforts, if combined with trade agreements and technology adoption, could be transformative,” she said.

On logistics, she said reforms must go beyond infrastructure. “The government has done a big push on infrastructure — it’s quite modern in many pockets — but logistics costs remain high because of monopolies, oligopolies, and red tape.”

The way forward: pairing AI with trade and reform

For India to raise its potential GDP from around 6.5–7 percent to the 8 percent required to achieve Viksit Bharat by 2047, Ohnsorge said the combination of AI adoption, deregulation, and trade integration could be key.

If India packages AI adoption with trade agreements that expand market access and domestic reforms that reduce business frictions, it would be a powerful growth mix, she said.