South Asia’s regional GDP growth slipped to 4.8 percent in 2012, following a robust recovery in the years after the 2008 global financial crisis. A weakening global economy, coupled with domestic difficulties (including policy uncertainties, structural capacity constraints, and a poor harvest) contributed to weaker regional growth in 2012.
The bulk of this regional slowdown reflects a continued deceleration in India (to 5 percent in the 2012 fiscal year ending in March 2013), but growth also slowed in other regional economies. Sri Lanka’s growth slowed sharply by nearly 2 percentage points in 2012. Bangladesh, Pakistan, and Nepal are expected to experience less marked slowdowns in their respective 2012-13 fiscal years, although actual growth rates in Pakistan and Nepal are much lower than in other countries in the region. In contrast, Afghanistan experienced double digit growth in 2012.
The regional trade balance deteriorated in 2012 due to weakening exports and rising demand for crude oil and other imports. India’s current account deficit widened sharply, but robust remittance inflows bolstered current account positions in Nepal, Bangladesh, and Pakistan.
More recently, activity in South Asia has picked up from its mid-2012 slump, with industrial output rising at different paces in India, Pakistan and Bangladesh in the second half of 2012 and in the first quarter of 2013 - while in Sri Lanka industrial production stabilized in the fourth quarter of 2012. South Asia’s exports (and imports) are also increasing, in line with strengthening global trade and output.
Inflation has moderated in several countries, helped in part by the easing of international commodity prices. But in general, consumer price inflation in the region remains higher than the average for the group of middle-income developing countries, and inflation expectations are still very high in India.
In addition, some countries have stepped up the reform agenda, seeking to contain fiscal deficits (including reduction of subsidies, by raising end-user fuel and electricity prices), and in the case of India, opening the economy further to international investment.
Outlook for 2013-15
Economic activity in South Asia is projected to strengthen during the course of 2013, buoyed by a gradual strengthening of external demand; a less volatile external environment; lower crude oil prices; reduced fiscal pressures due to lower fuel prices and lower subsidies; an improved crop (following last year’s weak monsoons); and continued remittance inflows. However, even as quarterly GDP accelerates, the sharp deceleration of growth in 2012 implies that whole year growth in 2013 will be a relatively weak 5.2 percent.
Looking further ahead, the stronger underlying momentum in 2013, coupled with firming external demand and improvement in investment spending (assuming policy and fiscal reforms are sustained), should help to accelerate the region’s growth to 6.1 percent in 2014 and then 6.4 percent in 2015. Growth in India is projected to rise to 5.7 percent in the 2013 fiscal year, and accelerate to 6.5 percent and 6.7 percent in FY2014 and FY2015.
Risks and vulnerabilities
Risks to the outlook for the region are broadly balanced.
External risks are diminishing but remain External risks from the Euro Area and of fiscal sustainability in the United States have diminished. But the region’s vulnerability to a deterioration in financial flows has picked up due to rising current account deficits, notably in India. A more rapid than expected decline in commodity prices would help outturns by reducing current account and fiscal deficits, and by easing inflationary pressures and boosting domestic incomes.
Domestic challenges are gaining prominence Domestic issues, including continued progress in fiscal consolidation; the quality of this year’s rice crop; and success in reversing the earlier increase in inflationary expectations will contribute to determining the pace of recovery going forward. Perhaps most importantly, will be continued progress in implementing reforms that relieve supply-side constraints, such as reducing energy supply bottlenecks, labor market reforms, improving the business climate, and investing in education, health and infrastructure.
South Asia regional forecast (annual percent change unless indicated otherwise)
Source: World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. PPP GDP = GDP measured at PPP exchange rates. d. Exports and imports of goods and non-factor services (GNFS). e. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan; from July 16 through July 15 in Nepal; and April 1 through March 31 in India. Due to reporting practices, FY2010/11 data for Bangladesh, Bhutan, Nepal, and Pakistan are reported in CY2011, while FY2010/11 data for India are reported in CY2010.
South Asia country forecasts - calculated by fiscal year (FY) (annual percent change unless indicated otherwise)
Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. GDP figures refer to fiscal years (FY). The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan; from July 16 through July 15 in Nepal; and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010. b. GDP measured in constant 2005 U.S. dollars.
South Asia country forecasts - calculated by calendar year (CY) (annual percent change unless indicated otherwise)
Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. GDP figures presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India and Pakistan are calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity. b. GDP measured in constant 2005 U.S. dollars.
Current account balance
South Asia current account balance forecasts - calculated by calendar year (Percent of GDP)
Source: World Bank. a. Current account balance shares over intervals are simple averages over the period.
South Asia net capital flows US$ billions
Source: World Bank. Note: e = estimate; f = forecast