Given the recent extremely high degree of volatility and massive shifts in demand across global markets, the outlook remains highly uncertain, particularly with respect to the timing of negative impacts and the rebound in activity.
On the upside, some industries could benefit from shifts to lower-cost providers, such as for low-end textiles (Bangladesh) and outsourcing (India). In India, the reform agenda of the newly elected government has already improved investor sentiment and could yield an even stronger recovery in investment demand. In Sri Lanka, the recent end of the decades old civil war has buoyed domestic sentiment, which could also provide a fillip to growth and stronger than envisioned outcomes.
A recovery of global growth that is stronger and more rapid than currently anticipated would support higher growth outcomes for South Asia, primarily through stronger external demand leading to higher export growth, and an improved risk appetite translating into higher capital inflows.
Although such upside outcomes are possible, downside risks are more pronounced.
More negative growth outturns could be driven by a deeper and more protracted global recession as outlined in chapter 1. This would lead to weaker external demand and a slower rebound in investment growth in South Asia. A protracted global recession would translate into a sharper decline in remittances than forecast, where Bangladesh, Nepal, and Sri Lanka, in particular, would be vulnerable.
Additionally, in such a scenario, foreign assistance could be curbed, as high-income countries face their own mounting fiscal pressures. Afghanistan, in particular, would be exposed to significantly reduced aid flows, where aid accounts for two-thirds of central government expenditures.
However, given its geopolitical importance, a falloff appears unlikely. Reduced aid would force a further contraction in fiscal spending especially in countries like Bangladesh, Pakistan, and Sri Lanka, where aid represents 21, 9, and 9 percent of central government expenditures. On the domestic front, downside risks are tied in particular to the region’s large fiscal obligations and relatively high reliance on taxes on trade and large subsidy programs, both of which would lead to heightened fiscal pressures in the event of a protracted global recession (see figure on previous page).
Ongoing budgetary pressures are also likely to lead to cuts in development spending. Large fiscal deficits also represent a threat to long-term growth, weighing on potential output by crowding out private investment through the increased call on capital by the public sector (by foreign and domestic agents) and higher interest rates.
Growing public sector obligations also are likely to translate into increased debt ratios, raising the risk of default. Central government debt represents 85 percent of GDP in Sri Lanka, over 70 percent in Bhutan, and close to 55 percent in India, the Maldives, and Pakistan. With slower growth outturns and rising unemployment, higher poverty is a significant political, humanitarian and economic risk.
South Asia’s social protection spending is less developed than in East Asia and the Pacific and the Middle East and North Africa where social insurance spending represents 2.9 percent and 3 percent of GDP, respectively. In South Asia it is less than half that amount at 1.4 percent.
Separately, security threats, civil strife, and political uncertainties remain of concern across much of the region. 
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