Title page 1

Contents 6

Acknowledgments 9

Executive Summary 10

Abbreviations 12

CHAPTER 1. South Asia's High-Energy Growth 15

Summary 16

Global developments and outlook 17

Developments in South Asia 20

Sectoral developments 22

Country developments 23

Outlook for South Asian countries 26

Risks and vulnerabilities 28

Persistently elevated energy prices 28

Reversal in global AI activity 30

Food insecurity and natural disasters 33

Policy challenges 34

Scaling up energy generation 34

Creating jobs with low entry barriers at scale 37

Realizing the promise of AI 45

Annex 1.1. Policy and macroeconomic response to the energy price shock 49

References 51

CHAPTER 2. Delivering the Promise of AI in South Asia 56

Introduction 57

Firm-level AI adoption: Evidence from a representative sample of formal firms in India 64

How AI is shaping South Asia's GVC relationships 68

The impact of AI-assisted teachers: Evidence from a winter school 72

Data centers: Benefits and costs in South Asia 76

Policies to realize AI promise in South Asia 79

Annex 2.1. Data sources 84

Annex 2.2. Empirical strategy and methods 89

References 97

TABLE 1.1. Growth in South Asia 27

FIGURE 1.1. Summary 17

FIGURE 1.2. Energy market developments 18

FIGURE 1.3. Global growth and inflation 19

FIGURE 1.4. Financial markets and monetary policy 20

FIGURE 1.5. Regional economic activity 21

FIGURE 1.6. Sectoral developments 22

FIGURE 1.7. Country developments 25

FIGURE 1.8. Outlook 28

FIGURE 1.9. Risk of persistently elevated energy prices 29

FIGURE 1.10. Reversal in AI activity 30

FIGURE 1.11. Reversal in AI investment, financial implications 32

FIGURE 1.12. Food insecurity and natural disasters 33

FIGURE 1.13. Scaling up energy generation 35

FIGURE 1.14. Creating jobs at scale in tourism 37

FIGURE 1.15. Creating jobs at scale in agribusiness 45

FIGURE 1.16. Realizing the promise of AI 46

FIGURE 2.1. AI investment and cross-country diffusion 58

FIGURE 2.2. Labor market exposure and impacts of GenAI in South Asia 59

FIGURE 2.3. The global rise of AI data centers 60

FIGURE 2.4. AI adoption in Indian and U.S. firms 65

FIGURE 2.5. Which firms are adopting AI? 66

FIGURE 2.6. Which firms expect to gain most from AI? 67

FIGURE 2.7. Constraints and policies 68

FIGURE 2.8. AI and the GVC relationships of U.S. firms with South Asia 69

FIGURE 2.9. AI and the GVC relationships of South Asian firms with the United States 71

FIGURE 2.10. Foundational learning gaps in EMDEs 74

FIGURE 2.11. Impact of AI-assisted teaching: Randomized trial of a winter school 75

FIGURE 2.12. Cloud demand and imports 76

FIGURE 2.13. Costs and benefits of data center proximity 77

FIGURE 2.14. Drivers of data center location 78

FIGURE 2.15. Factors for comparative advantage in compute 79

FIGURE 2.16. Policies to spur AI adoption: What do firms prioritize? 81

Boxes 7

BOX 1.1. South Asia's compressed demographic transition 38

FIGURE B1.1.1. South Asia's demographic trends 40

FIGURE B1.1.2. The impact of aging on consumption 41

FIGURE B1.1.3. Productive and financially secure aging 42

FIGURE B1.1.4. Policy options 43

Annex Table A.2.1.1. AI adoption index by sectors in India 92

Annex Table A.2.2.1. Correlates of the AI adoption index 93

Annex Table A.2.2.2. Correlates of expected sales per worker gains from AI development 94

Annex Table A.2.2.3. Impact of AI exposure on AI skills hiring: U.S. firms 95

Annex Table A.2.2.4. Impact of AI exposure on the number of GVC connections 95

Annex Table A.2.2.5. Impact of AI exposure and counterparty AI exposure on GVC connections 96

Annex Table A.2.2.6. Impact of AI exposure on AI skills hiring: South Asian firms 96

FIGURE A.1.1. Policy and macroeconomic response to the energy price shock 50