South Asia remains world’s fastest growing region, but should be vigilant to fading tailwinds

Economic growth expected to gradually accelerate to 7.3% in 2017 from 7.1% in 2016

Led by robust growth in India, South Asia shows resilience in the face of turbulent international markets and remains the fastest-growing region in the world, with economic growth forecasted to gradually accelerate from 7.1% in 2016 to 7.3% in 2017, a World Bank report said yesterday.

According to the twice-a-year South Asia Economic Focus, the region’s economic performance prospects remain strong due to its limited exposure to global turbulence, coupled with increasing investment activity.

However, there are also signs of fading tailwinds. Capital flows to the region have declined and remittances from oil exporting countries have started to weaken. Fuel and food prices remain low but are unlikely to keep falling. As a result overall output growth is slower than previously anticipated and inflation has recently been creeping up.

Given its weight in the region, India sets the pace for South Asia as a whole. Economic activity is expected to accelerate from 7.5% in FY2016 to 7.7% in FY2017 based on the expectation of strong private investment, a push in infrastructure spending, an improved investment climate, and deleveraged corporate and financial balance sheets.

“South Asia has been resilient to global turbulence due to its limited exposure to slowdowns in other major economies coupled with the tailwinds of favourable oil prices, capital flows, and remittances,” said Annette Dixon, World Bank South Asia Vice President. “However, fiscal and financial vulnerabilities remain and countries should strive to address them through generating revenue and creating more fiscal space”

The report’s analysis of fiscal policy across the region suggests that governments need to find a balanced path towards fiscal consolidation.

“Fiscal policy has a wide range of impacts for development. The fiscal deficit affect macroeconomic stability, capital expenditures are needed for growth, and taxes and social spending matter for equity,” said World Bank South Asia Chief Economist Martin Rama. “With the currently low oil prices, this is also an opportune time for South Asian policy makers to introduce or expand explicit carbon taxes. This would improve environmental and fiscal sustainability at the same time.”