South Asian countries collect exceptionally low levels of tax revenue and have significant public spending needs to reduce poverty and enhance growth. Afghanistan, Bangladesh, Bhutan, India, Maldives, Pakistan and Sri Lanka are consistent underperformers in achieving the Millennium Development Goals and the governments in the region really need to build up infrastructure and improve social service provision—such as education and health.
The average revenue collection in the region ranges from 10 and 15 percent of Gross Domestic Product (GDP), compared to an average of 20 percent in comparable developing countries, and —excluding Maldives and Bhutan— even higher rates in more developed countries.
This fact is even more significant when seen against the acute need for productive government spending required to reduce poverty and enhance growth. The average per capita income of the eight countries is US $1,300 as compared with, say, the average of East and South East Asia of more than $4,200 with almost half of the world’s poor living in South Asia (US $1.25 a day).
To improve public services and infrastructure, a significant increase in fiscal spending will be required. Yet, fiscal resources of most South Asian countries are limited, and social and infrastructure spending remains much lower than in other countries—and much less than needed. Additional borrowing to address high expenditure needs is a nonstarter because of the already high debt levels in South Asian countries.
Of course, one might argue that revenue levels are affected by the economy’s structures and that if structural differences are accounted for, South Asian countries may not be such poor revenue performers. For example, on average they have lower per capita income, higher agricultural shares of GDP, and lower international trade than most regions of the world —all of which likely reduce revenue collection. But they have lower revenue collection than countries in the rest of the world—even after income levels and economic structures are taken into account.