A World Bank report titled South Asia Economic Focus says that led by a resilient India, South Asia is expected to maintain its lead as the fastest-growing region in the world, with economic growth forecast to accelerate from 7 per cent in 2015 to 7.4 per cent in 2016.
According to the bi-annual South Asia Economic Focus, this positive performance hinges on solid growth in services, domestic consumption, and a gradual rise of investments. Limited exposure to the financial turmoil and an improved external position have given most South Asian countries important policy space.
Given India’s weight in the region, its performance greatly influences the projections for South Asia as a whole, the report said. Improved investor sentiment and resilience to external shocks are expected to increase India’s growth rate to 7.5 percent in fiscal year 2015 and further to 7.8 per cent in FY 2016.
Inflationary pressures have eased markedly in South Asia because of low food and commodity prices, as well as a slowdown in the growth of administered prices, the report said. Yet the pace of disinflation varies depending on the price index considered. Revisions to national accounts, together with new comparable data on purchasing power around the world, also raise questions regarding the measurement of prices in the region.
According to the report, South Asia could actually have cheaper prices, faster growth and bigger economies than previously thought.
“While the region is now in a position of strength, structural constraints holding back export and investment growth do persist. To keep the momentum and accelerate job creation, governments should enact reforms easing infrastructure bottlenecks and paving the way to greater competitiveness,” World Bank South Asia Chief Economist Martin Rama said. “Fiscal space remains limited while financial sector vulnerabilities persist.”
Rapid growth has not yet translated into significantly higher government revenue generation and improved fiscal balances. Budget deficits are expected to remain at 6.5 per cent of GDP in 2015, the highest among all developing regions. Tax collection remains well below estimates, and has even deteriorated across major South Asian economies.
“Mobilizing revenue is critical for the region to develop its infrastructure and deliver better social services, while creating a financial cushion to address potential shocks in the future,” said Annette Dixon, World Bank South Asia Vice President. “In some cases introducing and rolling out modern tax instruments holds the key to higher revenue, but containing exemptions and special regimes are crucial across most of the region.”
In India, GDP growth is expected to accelerate to 7.5 per cent this year and 7.8 per cent in 2016 lifted by cheap oil prices and limited exposure to the global financial turmoil. However, delays in the adoption and implementation of key reforms could affect investor sentiment. A weak trade performance and financial sector vulnerabilities could also hold back GDP growth, the report warned.
It said that while many South Asian countries show potential for accelerated growth in the short to medium term, the transition in Afghanistan, the earthquakes in Nepal, and revisions to national accounts in Sri Lanka, have resulted in all three countries experiencing slower growth than previously expected. (SH)