South Asia: the fastest-growing region in the world
Driven by a strong expansion in India, coupled with favourable oil
prices, economic growth in South Asia is expected to accelerate. The
region is among the greatest global beneficiaries from cheap oil, as all
countries in it are net oil importers. In the last quarter of 2014 South
Asia was already the fastest-growing region in the world, a World Bank
report said.
According to the twice-a-year South Asia Economic Focus report,
regional growth is projected to steadily increase from 7 percent in 2015
to 7.6 percent by 2017 through maintaining strong consumption and
increasing investment. Given India’s weight in regional Gross Domestic
Product (GDP), the projections reflect to a large extent India’s
expected growth acceleration, driven by business-oriented reforms and
improved investor sentiment.
The decline in oil prices has been reflected in the domestic prices
of oil products to different extents across the region. The pass-through
exceeded 50 percent for most oil products in Pakistan, but was nil in
Bangladesh.
Together with favorable food prices, cheaper oil has contributed to a
rapid deceleration of inflation. South Asia went from having the highest
inflation rate among developing regions to having the lowest in barely
one year. In March 2013, the Consumer Price Index (CPI) of the region
had increased by 7.3 percent year-on-year, compared to 1.4 percent in
March 2015.
External vulnerabilities have receded, the report shows. Current
account balances are strong in most countries. Capital inflows to India
have increased from 1.9 to 3.4 percent of GDP.
International reserve buffers have been built across the region,
including in Pakistan which is now out of the danger zone.
However, the export performance of the region has disappointed. After
a promising rebound last year, exports are now slowing down. By end
2014, export growth was close to zero across the region.
“The biggest oil price dividend to be cashed in by South Asia is one
yet to be earned, but it is not one that will automatically transit
through government or consumer accounts” said World Bank South Asia
Chief Economist Martin Rama.
“Cheap oil gives the opportunity to rationalize energy prices,
reducing the fiscal burden from subsidies and contributing to
environmental sustainability”, he added.
The report notes that India has already taken encouraging steps to
decouple international oil prices from fiscal deficits and to introduce
carbon taxation to address the negative externalities from the use of
fossil fuels. The challenge will be to stay the course in the event of
oil price hikes.
“Savings from reduced subsidy bills could be used to address the
crying needs of the region in terms of infrastructure, basic services
and targeted support for the poor”, said World Bank Vice President for
South Asia Annette Dixon.
The report shows that households in the region stand to gain from
lower oil prices, both directly through lower energy spending and
indirectly through faster growth. But except for kerosene, richer
households spend more in oil products, and stand to gain more.
In Afghanistan, a successful political transition needs to be
supplemented by a stable security environment as well as by adequate
management of the current fiscal crisis.
In Bangladesh, the economy is maintaining macroeconomic stability,
despite the political turmoil, structural constraints, and global
volatility. However, a recovery driven by strong domestic demand is
possible.
Economic activity in Bhutan is expected to gain momentum with real
GDP growing at 6.7 percent in 2015.
In India, GDP growth is expected to accelerate to 7.5 percent in
Fiscal Year 2015/16. Nepal’s growth will remain in the 4.5 to 5 percent
range. In Pakistan, a gradual recovery to around 4.6 percent growth by
2016 is aided by low inflation, and fiscal consolidation.
In Sri Lanka, growth is expected to decline to 6.9 percent in 2015
due to slowing construction activity. This trend is partially set off by
consumption growth thanks to increased public sector wages and higher
disposable income.
With competitiveness remaining a challenge, the new government is
reassessing the previous investment-led growth model. - World Bank
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