Regional GDP in South Asia, measured at market prices, grew an estimated 4.7 percent in 2013, down from 5.0 percent in 2012. Regional growth in 2013 was 2.6 percentage points below average growth in 2003-12, mainly due to subdued manufacturing performance and a sharp slowing of investment growth in India. Pakistan’s growth is estimated to have remained broadly stable notwithstanding fiscal tightening, but remains significantly below the regional average, due in part to energy supply bottlenecks and security uncertainties. India’s exports received a boost from steep currency depreciation during the second half of 2013, after the U.S Federal Reserve’s “taper talk” in late May 2013. A sharp current account adjustment (from a deficit of nearly 5 percent of GDP in Q2 2013 to 0.2 percent of GDP in Q1 2014) was achieved mainly through efforts to curb imports. In the rest of the region, as demand from high-income countries improved, exports in Bangladesh and Sri Lanka grew rapidly. Bangladesh’s export growth, however, slowed in Q1 2014, partly due to the lagged effect of political unrest. Pakistan’s exports slowed more sharply, reflecting in part pervasive electricity and natural gas shortages.
Inflation in the first quarter of 2014 was above 7 percent (y/y) in Bangladesh, Pakistan, India and Nepal, reflecting structural capacity constraints and persistence of food inflation. Despite some consolidation, fiscal deficits remain high. India’s general government deficit, despite falling in recent years, is still more than 2 percentage points of GDP higher than in 2007, indicating that depleted fiscal buffers have yet to be fully restored. In Pakistan, fiscal restraint has reduced the deficit from over 8 percent of GDP in FY2011-12 to an estimated 6 percent of GDP in FY2013-14. However, sustaining fiscal consolidation could prove challenging as revenue mobilization in the region remains weak, while subsidies for fuel, food and fertilizers impose substantial pressure on the expenditure side. Measures to gradually reduce subsidies, and to raise revenues by simplifying the tax system, broadening the tax base, and improving compliance, can help to reduce deficits. Capital flows to the region have grown steadily since the mid-2013 financial turmoil. Growth in remittances slowed in 2013, but remittances continue to provide support to consumption and external balances in most countries in the region.