South Asia Development Update April 2024

Output growth in South Asia, projected at 6.0–6.1 percent in 2024–25, continues to exceed that in other emerging market and developing economies, but this is largely due to strong growth in India. In the rest of the region, while picking up, it is expected to remain mostly well below pre-pandemic averages. More than in other emerging market and developing economies, growth is being driven by the public sector. Many of the underlying vulnerabilities that had previously caused balance-of-payments pressures remain, and point to downside risks to growth. Stronger job creation and the easing of financial market restrictions could help boost growth, private investment, and government revenues and put in place conditions conducive to climate adaptation.

Private investment growth has slowed sharply from pre-pandemic averages in all South Asian countries, hampering the region’s efforts to meet development and climate objectives. Historically, sustained accelerations in private investment were most likely to occur when institutional quality was strong, the real exchange rate was competitive, and economies were more open to trade and capital flows.

South Asia is highly vulnerable to climate change. However, severely constrained fiscal positions will limit the scope for public policies to facilitate climate change adaptation. This means that the burden of adaptation will fall disproportionately on firms, farmers, and households and, especially, poor households, which typically suffer greater damage from climate shocks. A comprehensive and systematic review of climate change research identifies a variety of adaptation strategies used by households, firms, and farmers, which have offset 46 percent of climate damage, on average. Firms have access to the most effective adaptation strategies, typically technology-related, whereas the least effective strategies are employed by households and farmers, often in the form of labor market adjustments.

South Asia’s labor markets stand out among EMDEs for having suffered for decades from declining employment ratios (that is, employment relative to the total working-age population) and exceptionally low shares of women in employment. While agriculture has shed labor, as it has in other EMDEs, the non-agriculture sector has been unusually slow in creating jobs. This partly stems from challenging institutional and economic environments that have held back firms’ growth. As a result, the region has relied on labor productivity and population growth as engines of output growth. However, working-age population growth is expected to slow, and labor productivity growth has already slowed sharply since the COVID-19 pandemic. Sustaining growth will require increasing employment ratios, especially in the non-agriculture sector and among women, through measures to remove obstacles to growth for businesses, increase openness to international trade, ease labor market and product market restrictions, build human capital, and strengthen equality of women’s rights.

South Asia is highly vulnerable to climate change—including floods, extreme heat, and sea level rise. The burden of adapting to climate change falls disproportionately on poor households, which are typically more vulnerable to climate shocks.

South Asia did not create nearly enough jobs during 2000-23 to keep pace with its growing working-age population. As a result, its employment ratio (employment relative to the working-age population) declined, while the average employment ratio of other emerging market and developing economies (EMDEs) held steady.

In South Asia, output growth remains stronger than in other emerging market and developing economies, largely due to strong growth in India. Growth in the rest of the region is picking up, but in most countries it is expected to remain well below pre-pandemic averages, and is insufficient to make progress toward advanced-economy per capita income levels.

Ten years ago, Northern Bangladesh was hit by severe and relentless monsoon rains. The rivers burst their banks, hundreds of villages went under water, entire crops were lost, half a million people were made homeless, and millions more were affected in other ways. Households in the impacted regions faced rising food insecurity.