Pushingthe Global Economy: Priorities for South Asia

A recent World Bank report on the current status of South Asian economiesshows a relatively stronger output growth compared to other emerging market and developing economies, largely driven by India’s robust economic expansion

 

In 2024, advanced economies are expected to experience a growth slowdown, which poses challenges for South Asian governments in implementing policies to address risks and development challenges. However, the current status of South Asian economies shows a relatively stronger output growth compared to other emerging market and developing economies (EMDEs), largely driven by India’s robust economic expansion. This, and other significant developmental aspects of the South Asian economies have been exhaustively captured and analysed in a recent World Bank report titled South Asia Development Update: Jobs for Resilience. Released by the Office of the Chief Economist for the South Asia Region (SARCE) this April, the report has been created by World Bank analysts in collaboration with external contributors.

The report points out that despite a gradual decline in inflation, South Asia experienced a slower decrease in inflation compared to other EMDEs due to persistent increases in food prices and the lingering effects of past currency depreciations. While most EMDEs weathered global financial tightening without significant stress, some South Asian countries, including Afghanistan, Maldives, Pakistan, and Sri Lanka, faced difficulties. These countries implemented macroeconomic policy tightening, capital controls, import restrictions, and economic adjustment and reform programs supported by the International Monetary Fund (IMF) to alleviate balance-of-payments pressures.

Excessive reliance on public sector

According to the World Bank report, South Asia was the fastest-growing EMDE region in 2023, and this trend is expected to continue in the coming years, mainly driven by strong growth in India. However, growth in South Asian economies other than India and Bhutan is projected to remain below pre-pandemic averages, and financially stressed economies are expected to experience slower recoveries.

The region’s growth is highly reliant on the public sector, which may pose sustainability challenges given weak fiscal positions across South Asia. Furthermore, currency depreciations after the pandemic have left several South Asian countries with limited buffers to respond to financial disruptions or balance-of-payments pressures. Delayed monetary policy loosening in major advanced economies or postponed domestic policy reforms could expose these countries to further currency crises.

Increased trade barriers and protective measures due to global geopolitical tensions could depress global trade, particularly in services, which South Asia heavily relies on. Climate change and extreme weather events also present growing risks to the region.

Long-standing development constraints

The report highlights that the combination of slowing global growth, heightened risks, and fiscal constraints will make it tough for governments to address long-standing development challenges. Raising government revenues substantially is crucial to overcome these constraints and enable spending on public goods, particularly in climate change adaptation. Reforms are needed to stimulate firm growth, enhance competitiveness, ensure a level playing field among firms, and improve the efficient allocation of capital to sustain growth in the region.

In an era of global economic challenges and a projected growth slowdown in advanced economies, South Asian governments face the task of implementing policies that can address risks and propel development. With limited fiscal resources, they must find innovative ways to drive economic growth, tackle climate change, and create employment opportunities.

Key measures to impact global economic growth

The World Bank report explores the following key measures which South Asian economies could consider in order to make an impact on global economic growth:

• Enhancing Government Revenues and Investment in Public Goods: South Asian governments have struggled to collect sufficient revenues, hindering their ability to invest in crucial public goods such as climate change adaptation. The region’s reliance on trade-related taxes creates economic distortions. To overcome these challenges, South Asian countries should consider broad-based taxes on consumption or income, with simplified processes and fewer exemptions. India’s successful implementation of the Goods and Services Tax (GST) can serve as a model. Strengthening tax administrations through digital data collection systems can improve compliance, reduce corruption, and expand the tax base.
• Building Climate Resilience and Greening the Economy: South Asia is highly vulnerable to the impacts of climate change, but limited fiscal resources pose a significant challenge to effective climate adaptation. The region should prioritise adaptation measures that leverage technologies and infrastructure to offset climate damage. Solutions that achieve both climate adaptation and mitigation goals are particularly effective. Shifting away from coal and investing in renewable energy sources is crucial for greening the economy and fostering sustainable growth.
• Promoting Private Investment and Removing Financial System Distortions: Accelerating private investment growth is essential for job creation and overall economic development. South Asian economies should focus on removing distortions in the financial system, such as interest rate controls, directed lending, and restrictions on banking sector entry. These administrative interventions, although aimed at maintaining financial stability, hinder efficient credit allocation and impede the transmission of monetary policy. Encouraging entrepreneurship, competition, and financial market development will mobilise capital for high-return investments and fuel economic growth.
• Fostering Job Creation and Productivity: South Asia faces the challenge of generating sufficient employment opportunities for its growing working-age population. Policy weaknesses, including small firm size and restrictive regulations, hinder job creation in the region. To address this, governments should support firm growth, enhance labour market flexibility, and promote women’s rights in the workforce. Additionally, reducing the prevalence of informal activity through measures such as formalisation initiatives and skills development programs will enhance productivity and create better-quality jobs.

South Asian economies must overcome various challenges and implement targeted policies to contribute significantly to global economic growth while ensuring a sustainable and inclusive future.