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South Asia

South Asia’s GDP growth rose to an estimated 4.6 percent in 2013 from 4.2 percent in 2012 on a market price-calendar year basis. Growth was, however, well below its pre-crisis pace, reflecting a combination of domestic imbalances, weakening investment rates, and a challenging external environment. A cyclical recovery in the second half of 2013 was led by a rapid expansion of regional exports, reflecting a gradual recovery in global demand and currency depreciation in India. India was hit particularly hard by a withdrawal of portfolio capital (resulting in steep depreciation of the rupee) in mid-year, stemming from apprehensions of tapering of U.S. quantitative easing. Although retail inflation remained high in some countries, normal harvests and lower international commodity prices helped stabilize consumption growth in South Asia. Sri Lanka experienced a significant decline in inflation during the course of 2013. In India, however, despite a negative output gap, consumer price inflation remained elevated at close to 10 percent (y/y) for much of the year. Pakistan also  faced inflationary pressures, while inflation picked up towards end of the year in Bangladesh. The growth  of remittances to South Asia moderated to an estimated 6.8 percent in 2013 from 9.7 percent in 2012. While India was the largest recipient by size, relative to GDP remittances were more important resource flows for Bangladesh, Nepal, Pakistan, and Sri Lanka in 2013.

South Asia’s regional GDP growth is projected to improve to 5.7 percent in 2014 in market price terms, and to rise to 6.3 percent in 2015 and 6.7 percent in 2016. A gradual improvement in regional growth over the forecast period will be led mainly by a recovery in global demand and domestic investment, although the latter remains subject to significant downside risks. A projected strengthening of demand in the Euro Area and United States (the two largest trade partners of South Asia) and robust growth in developing-country markets will support regional exports. Despite slowing of U.S. monetary stimulus, a recovery in regional investment is expected to buoy medium-term growth. The projected increase in investment rates and GDP growth, however, will depend critically on ensuring macroeconomic stability (including reducing fiscal deficits and inflation), making sustained progress on policy reforms, and reducing structural and regulatory constraints on production (particularly in the provision of energy and infrastructure). GDP growth in India measured at factor cost is projected to rise to over 6 percent in the 2014-15 fiscal year, and then to increase to 6.6 percent in FY2015-16 and to 7.1 percent in FY2016-17. Growth in Pakistan is expected to moderate to 3.4 percent in FY2013-14, as a result of necessary fiscal tightening, but rise to 4.5 percent in the medium term. Relatively stable or declining international commodity prices will contribute to reducing inflationary and current account pressures, and – together with normal harvests and sustained remittance flows – support consumption in the region.

Risks to the outlook for South Asia’s growth are tilted to the downside, on balance. Some upside risks include better-than-anticipated global growth, and lower crude oil prices than projected. Domestic risks are particularly relevant for a sustained revival of investment and for medium-term growth prospects. These main domestic risks concern the ability of South Asian countries to keep current and planned reforms from going off-track  and to maintain fiscal discipline. Political uncertainties related to national elections in Afghanistan, Bangladesh and India; entrenchment of inflation expectations (which could reduce space for monetary easing and adversely affect investment); and lack of progress in reducing supply-side constraints may also pose significant risks to the outlook. The tapering of U.S quantitative easing is expected to proceed gradually, but a disorderly adjustment of capital flows could result in currency depreciation pressures and put further stress on the region’s corporate and banking sector balance sheets. Prolonged weakness in the Euro Area and geopolitical risks in the Middle East are additional sources of risk.

South Asian policymakers must continue the urgent task of rebuilding domestic and external policy buffers and reducing imbalances to deal with potential intensification of external pressures, as well as accelerate productivity-enhancing reforms and improve their business environment to raise growth rates on a sustained basis. Given already large fiscal and current account deficits, high inflation, and weak reserve positions (or a combination of these) in some South Asian countries, policy makers need to maintain an appropriately tight macroeconomic stance to avoid exacerbating external vulnerabilities and domestic inflationary pressures.

South Asia regional forecast
(annual percent change unless indicated otherwise)

Source: World Bank
Notes: e = estimate, f = forecast
* Unless otherwise indicated, regional aggregates are computed for low and middle-income countries in the region and do not include any of the region's high-income countries.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010.

South Asia country forecasts
(annual percent change unless indicated otherwise)

GDP data for Afghanistan, Maldives and Sri Lanka is reported in calendar year (CY) terms.

Source: World Bank
Notes: e = estimate, f = forecast
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
* Published forecasts are for only low and middle-income countries in the region, hence no high-income countries are included.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period.
b. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Sri Lanka, which reports in calendar year (CY). The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010. GDP figures presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India and Pakistan are calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity.
c. GDP measured in constant 2010 U.S. dollars.

South Asia net capital flows
US$ billions

Source: World Bank
Note: e = estimate; f = forecast

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See the regional audio slideshow by the author.