World Bank forecasts South Asia to grow by 6.4% in 2012

The World Bank last week forecast South Asia to grow by only 6.4% in 2012 down from 7.1% last year.

“Policy uncertainties, fiscal deficits, entrenched inflation, and infrastructure gaps will continue to weigh negatively on investment activity and are expected to limit regional growth to a relatively modest 6.4% in 2012, 6.5% in 2013, and 6.7% in 2014,” World Bank said in its Global Economic Prospects (GEP), June 2012.

It said India will see growth (measured at factor cost) increasing to 6.9, 7.2 and 7.4% in fiscal years 2012-13, 2013-14 and 2014-15, respectively.

 “Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance. Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse,” World Bank’s Manager of Global Macroeconomics and lead author of the report Andrew Burns said.

World Bank said increased uncertainty will add to pre-existing headwinds from budget cutting, banking-sector deleveraging and developing country capacity constraints.

As a result, the World Bank projects that developing country growth will slow to a relatively weak 5.3% in 2012, before strengthening somewhat to 5.9% in 2013 and 6% in 2014. Growth in high-income countries will also be weak, 1.4, 1.9 and 2.3% for 2012, 2013 and 2014 respectively – with GDP in the Euro Area declining 0.3 percent in 2012. Overall, global GDP is projected to rise 2.5, 3.0 and 3.3% for the same period.

World Bank recalled that in 2011, growth in South Asia slowed to 7.1% from 8.6% in 2010, as headwinds from the Euro Area crisis caused a steep deceleration in exports and a reversal of portfolio inflows. Growth in India was particularly weak due to monetary policy, stalled reforms, and electricity shortages, which, along with fiscal and inflation concerns, cut into investment activity.