SOUTH ASIA ECONOMIC FOCUS, FALL 2021
SHIFTING GEARS: DIGITIZATION AND SERVICES-LED DEVELOPMENT
South Asia’s recovery continues as global demand rebounded and targeted containment measures helped minimize the economic impacts of the recent waves of COVID-19. But the recovery remains fragile and uneven, and significant risks exist that could jeopardize short-term recovery and long-term growth.
LATEST ECONOMIC DEVELOPMENTS AND OUTLOOK
- Regional growth is set to increase by 7.1 percent in 2021 and 2022, as the economic recovery in South Asia continues.[1]
- Despite devastating COVID-19 waves in the second quarter of 2021, countries were able to minimize economic impacts, thanks to more targeted and localized containment measures and a rebound in global demand.
- India’s economy, South Asia’s largest, is expected to grow by 8.3 percent in the fiscal year 2021-22, supported by increase in public investment to boost domestic demand and incentives schemes to boost manufacturing.
- In Maldives, output is projected to grow by 22.3 percent in 2021, as tourism bounced back strongly.
- In Sri Lanka, real GDP is expected to grow by 3.3 percent in 2021, with import restrictions, elevated food prices and shortages casting a shadow on the outlook.
- In Bangladesh, growth rates are expected to pick up to 6.4 percent in fiscal year 2021-22, as exports and private consumption continue to recover.
- In Bhutan, output is expected to grow by 3.6 percent in fiscal year 2021-22, supported by the return of migrant labor and large infrastructure project.
- In Nepal, GDP is expected to grow by 3.9 percent for the fiscal year 2021-22, as domestic vaccination picks up and tourism and migrant worker flow recover in the country.
- In Pakistan, growth is expected to ease a little to 3.4 percent in fiscal year 2021-22, as fiscal and monetary measures are expected to unwind.
- However, recovery remains uneven as many challenges and uncertainties remain. The strong near-term growth is driven in part by very low base numbers in 2020.
- The outlook will depend on the speed of vaccination, the possible emergence of new COVID variants, as well as any major slowdown in global growth momentum.
- Vaccine rollouts have accelerated but most countries still have some way to go to vaccinating majority of the population, as constraints on the supply of vaccines remain.
- Global recovery momentum is showing signs of a slowdown under the impact of the COVID Delta variant. Any major disruptions to the global recovery can have adverse impacts on South Asia, through trade, tourism, and migrant workers.
- Supply constraints have pushed up inflation in the region and as the economy recovers, rising demand may sustain the high inflation.
- In addition to the medium-term uncertainties, the pandemic has left scars on the economy, the impacts of which can last well into the recovery.
- World Bank projections show that economic activity in South Asia will stay well below the pre-pandemic trend for several years. South Asia’s average annual growth is forecast to be 3.4 percent over 2020-23, which is 3 percentage points less than it was in the four years preceding the pandemic.
- In South Asia, the pandemic is estimated to have caused 48 to 59 million people to become or remain poor in 2021.
- Many countries experienced lower investment flows, disruptions in supply chains, and setbacks to human capital accumulation.
- Many South Asian countries saw substantial increases in debt levels in 2020, with Maldives and Sri Lanka particularly vulnerable.
SHIFTING GEARS TOWARDS SERVICES-LED DEVELOPMENT
- As South Asia builds back, policymakers have a chance to rethink long-term development models.
- The emergence of a new services economy has created an opportunity for South Asia to shift gears and move away from the traditional manufacturing-led growth model toward a services-led development model.
- The role and contribution of services to economic growth has been unappreciated in large part because services’ value-added contribution to output has been difficult to measure.
- Countries in South Asia have a strong comparative advantage in exporting services, particularly business processes and tourism, whereas they have struggled to break into manufacturing export markets. Automation of the manufacturing sector is making it even harder to become highly competitive in international markets.
- The pandemic has uncovered new roles for digital remote services, while new inventions have created growth opportunities for the supply of services. Moreover, digital technologies make services more tradable and enable services to increase productivity of other sectors—including manufacturing. Digital platforms open up new markets for firms.
- Governments in South Asia face major hurdles.
- Existing regulations of business services in South Asia are stricter than in most other countries and these regulations have created vested interests and entry barriers, despite the notable success promoting the Business Process Outsourcing sector.
- An implicit preference for manufacturing in several South Asian countries makes it difficult to find the political will for major reforms in the services sectors.
- Even globally, countries are struggling to find an optimal institutional environment for the new services sectors.
POLICY OPTIONS
- To unleash the growth potential and minimize the damages from COVID-19, policymakers need to strike a careful balance between preserving livelihoods, minimizing scarring, and promoting recovery in healthy sectors. Primarily, it will be necessary to:
- reverse the setback to human capital accumulation by expanding social safety nets and allocating adequate resources to healthcare and education,
- support productivity through policies to facilitate job mobility and promote competition and innovation, and
- optimize public infrastructure investment, particularly in green infrastructure to help crowd-in private investment.
- To realize the potential of the new services economy, policy makers should rethink regulations and establish new institutions.
- Lower entry barriers to create more national and international competition, while preventing the emergence of new monopoly powers.
- Enable increased mobility in labor markets, while encouraging upgrading of skills, both through education and on-the job training.
- Facilitate the absorption of the new services, both by firms and households.
[1] In Afghanistan, given the evolving situation, the country data is not included in the regional forecast.
Last Updated: Oct 07, 2021