South Asia Development Update October 2023

Toward Faster, Cleaner Growth

At just under 6 percent, South Asia is expected to grow faster than any other developing country region this year—but slower than its pre-pandemic pace and not fast enough to meet its development goals. The region faces many risks to this outlook, including due to fragile fiscal positions created by high government debt. Countries need to urgently manage and reduce fiscal risks, and over the longer term, accelerate growth and create jobs in a sustainable manner. The global clean energy transition is an opportunity for the region to lift productivity, cut pollution, reduce reliance on fuel imports, and create jobs. To capitalize on this, countries need to encourage the adoption of advanced energy-efficient technology and take steps to protect vulnerable workers impacted by labor market shifts.

Sections

  • SADU-Report_Chp1_Oct2023
    Chapter 1. Regional economic outlook: Solid progress, but a long way to go

    At just under 6 percent, output growth in South Asia is expected to remain stronger than in other regions in 2023–25, even with weak growth in the countries recovering from recent balance-of-payments crises. Foreign exchange and financial markets in these countries have stabilized, in part owing to the introduction of IMF-supported policy programs. But the financial systems of many countries in the region remain vulnerable and fiscal positions remain fragile. In some cases, restrictions on imports and foreign exchange transactions have yet to be fully unwound. The outlook is subject to downside risks from weak financial systems and fiscal positions. Growth prospects would also worsen in the event of a further economic slowdown in China or climate change-related natural disasters. In the short term, policy priorities include preserving financial stability and improving fiscal sustainability. In the longer term, it is important to boost private investment growth, make economies more open to trade, and seize the opportunities offered by the global energy transition.

  • SADU-Report-Box-1-1-Frame
    Box 1.1 Fiscal deteriorations around elections

    Among EMDEs, primary fiscal deficits, primary government expenditures, and government wage bills have tended to rise significantly around election years. While primary spending increases have tended to be partially reversed in the following year, post-election reversals of primary deficit and government wage bill increases have been more variable and at best partial. The consequent ratcheting up of primary deficits around elections in EMDEs can erode fiscal sustainability over the longer term, while the expansion of government wage bills can result in spending rigidities. In South Asia, in particular, fiscal positions have tended to deteriorate around national elections, and, in some cases, there is also evidence of targeted fiscal actions around subnational elections. While this result is true on average for the region, some countries—notably India in its 2023 budget—have avoided the risk of election-induced current spending increases. This points to a way forward for fiscally constrained governments in South Asia.

  • SADU-Report-Spotlight_Oct2023
    Spotlight. Averting and dealing with sovereign debt default

    South Asia has the highest average government debt-to-GDP ratio among emerging market and developing economy (EMDE) regions, at 86 percent in 2022, and four of the region’s countries are rated in or near sovereign debt distress. The risk of sovereign defaults in the region is heightened not only by high levels of government debt but also by the increases in global interest rates over the past two years: the vast majority of past defaults occurred around the end of U.S. monetary policy tightening cycles and in countries with above-median government debt-to-GDP ratios. Past experience also shows that more than one-third of defaults failed to lower government debt or borrowing costs in a lasting manner. Defaults that succeeded in lowering debt or borrowing cost were accompanied more frequently than others by above-median debt restructurings, growth accelerations, and fiscal consolidations. South Asia’s above-average economic growth mitigates some of the default risks. Some South Asian countries have reduced their default risk by predominantly borrowing from domestic creditors. However, this strategy comes at a price: high domestic shares of government debt have been associated with higher borrowing costs and lower bank credit to the private sector. With the external environment likely to remain challenging over the next several years, it is all the more important to adopt policies to accelerate sustainable growth and shore up fiscal positions.

  • SADU-Report-Chp2_Oct2023
    Chapter 2. Recruiting firms for the energy transition

    As the world presses ahead with the energy transition, new energy-saving technologies offer South Asian countries an opportunity to modernize their economies. Currently, the energy intensity of output of South Asian economies is almost twice the global average—despite a decline over the past two decades that was almost entirely driven by firm-level, within-sector cuts in energy intensity. While the region’s firms have been early adopters of basic energy-saving technologies, they have lagged in the adoption of more advanced technologies, with smaller firms lagging particularly far behind. Policies that have been effective at encouraging technology adoption among firms include market-based regulation, dissemination of accurate information on energy savings, and financial support.

  • SADU-Report-Chp3_Oct2023
    Chapter 3. Stranded jobs? The energy transition in South Asia’s labor markets

    The transition away from fossil fuels in South Asia will have significant labor market impacts, which could leave many workers stranded in lower-wage jobs in declining industries. In all South Asian countries except India, pollution-intensive jobs outnumber green jobs and account for 6–11 percent of all jobs; only in India do green jobs outnumber—and then only slightly—pollution-intensive jobs, which account for 9 percent of all jobs. Pollution-intensive jobs are concentrated among lower-skilled and informal workers, whereas green jobs tend to be held by higher-skilled, better-paid, and formal-sector workers. Experience from past major economic transformations, especially in resource sectors, suggests that the transition from fossil fuels will have large effects on the structure of employment and earnings, with lasting losses for some workers, and can cause significant internal worker migration. A wide range of policies will be needed to facilitate the necessary adjustment in labor markets while protecting vulnerable workers. These include: the provision of better access to high-quality education and training, finance, and markets; measures to facilitate labor mobility; and strengthening social safety nets.

The World Bank’s latest economic outlook explores growth prospects for South Asia and provides analysis on how the region can benefit from the green energy transition.

Charts & Data

Growth in South Asia

Output growth in South Asia is projected to remain stronger than in other regions, but below the pre-pandemic average.

SADU Oct 2023_Growth chart


Sources: World Bank (Macro Poverty Outlook).
Note: (e) = estimate; (f) = forecast; EMDEs = emerging market and developing economies; SAR = South Asia. Blue bars reflect the range of growth across all the other EMDE regions. Regional aggregate computed using 2015 GDP as weights. Sample includes 7 countries in SAR and 136 in other EMDE regions.

Government debt

Government debt is higher and has risen faster since 2010 in the average South Asian country than in the average emerging market and developing economy.

Government debt

Source: IMF (various staff reports); Kose et al. (2022); World Bank.
Note: Latest available data are for end-2022. Unweighted averages (at 2010-19 average prices and market exchange rates). Yellow whiskers indicate minimum-maximum range for seven South Asian economies ("SAR"), and interquartile range for emerging market and developing economies ("EMDEs").

South Asia: Change in fiscal outcomes around elections 

Around past elections in South Asia, primary fiscal deficits and spending rose; these increases were not fully unwound after the elections.

SADU Oct 2023_Election Chart

Source: The Database of Political Institutions 2020; International Monetary Fund; World Bank; de Haan, Ohnsorge, and Yu (forthcoming).
Note: Based on 28 parliamentary or executive elections in SAR since 1991. Unweighted averages unless otherwise indicated. “Elections” is defined as the unweighted average of the change in the year before the election and the election year; “Post-elections” is defined as the unweighted average of the change in the year following the election and the subsequent year.

Share of firms adopting energy efficient technologies

SAR firms have been early adopters of basic technologies but lag in the adoption of more advanced technologies.

SADU Oct 2023_Energy Chart

Source: World Bank’s Firm Adoption of Technology (FAT) Surveys Wave 2.
Note: Includes World Bank’s Firm Adoption of Technology (FAT) Surveys of 10,090 firms in seven EMDEs (Brazil, Bangladesh, Cambodia, Chile, Ethiopia, India, and Georgia). The chart depicts the range of country-level averages of percent of firms adopting technologies in South Asia and other EMDEs. For each country, the average percent of firms adopting a technology is estimated using sampling weights. The technologies are energy-efficient lighting and programmable thermostats.

Actual and perceived energy savings by firms

Firms underestimate the energy-saving benefit of a new technology.

 

Energy-saving benefit of a new technology

Source: Chaurey et al. (2023).
Note: From a study of technology adoption among 504 firms in the leathergoods sector of Bangladesh. The left bar depicts the estimated percentage reduction in electricity consumption per day from switching a clutch motor (old technology) with a servo motor (new technology) in a sewing machine, based on readings from electricity meters installed in 124 firms. The right bar depicts the percentage reduction in electricity consumption implied by firms' mean beliefs about electricity consumption per day in clutch versus servo motor sewing machines, estimated from survey data.

 

Green and pollution-intensive jobs in South Asia 

In all South Asian countries other than India, pollution-intensive jobs outnumber green jobs and account for 6–11 percent of all jobs.

Green and pollution-intensive jobs in South Asia

Note: Green jobs are those in occupations with a positive share of environmentally friendly tasks as defined in Granata and Posadas (2022). Pollution-intensive jobs are those in the most common occupations (at the 6-digit IOSCO level) in the five percent of industries that have the highest emissions of pollutants per worker as in Vona et al. (2018; annex 2). Labor force surveys are available for India (2018), Pakistan (2018), Maldives (2019), Sri Lanka (2019), Nepal (2017), and Bangladesh (2015). Standard errors are clustered at the district/state level. Industry and sub-national region fixed effects are included.

Blogs

  • Letter cubes spelled default
    Between a rock and a hard place: Averting, or dealing with, sovereign debt default

    The number of emerging markets and developing economies in debt distress is currently the largest since 2000. With global growth slowing and interest rates remaining high, the next few months may bring more countries to the brink of sovereign debt distress.

  • Image Picture of women learning to make solar lanterns in Rajasthan, India.  Women learning to make solar lanterns at Barefoo
    Stranded jobs? The energy transition in South Asia’s labor markets

    South Asia’s transition away from fossil fuels will have significant labor market impacts, which could leave many workers stranded in lower-wage jobs in declining industries. In most South Asian countries, pollution-intensive jobs outnumber green jobs.

  • Picture of a man standing next to electric rickshaw vehicles in India
    Energy-efficient technology can help modernize South Asia’s economies

    New energy-saving technologies offer South Asian countries an opportunity to modernize their economies, and will be an integral part of their energy transition. The energy intensity of output of South Asian economies is almost twice the global average—despite a decline over the past decade that is largely attributable to firm-level, within-sector cuts in energy intensity.

  • Picture of a man at a wind power mill in Bangladesh
    South Asia’s economic outlook in five charts

    Output growth in South Asia is projected to remain stronger than in other regions, but is nonetheless not strong enough for most countries to reach high-income thresholds within a generation. A sustained acceleration would require stronger private investment growth, which has been weak in most countries.

  • SADU Oct 2023_Blog-01
    A roadmap for faster, cleaner growth in South Asia

    At first glance, South Asia is a bright spot in the global economy. The World Bank is forecasting that the region will grow more quickly than any other developing country region over the next few years. Some countries in the region are continuing a trend of strong growth, while others are recovering from a period of turmoil.

  • Debt blog
    Prevention versus cure: Sovereign debt default in four charts

    High levels of government debt in the Emerging Market and Developing Economies (EMDEs), as well as the increases in global interest rates over the past two years, currently heighten risks of debt default in EMDEs.