Spotlight on South Asia: solid growth with Indian lead

All too often, India is referred to as the fastest growing economy worldwide. A new World Bank report now examines South Asia as a whole, shedding light on its economic development – and the results are indeed positive.

In general, South Asian economic growth is expected to increase from 7.1% to 7.3% within the following year. As opposed to that, the United Nations’ Trade and Development Report (TDR) 2016 merely depicts a slow global economic growth of 2.5% in 2017. Worldwide trade even broke down to 1.5% in 2015, compared to 7% previous to the world economic crisis. Hence, the South Asian region remains unaffected by China’s downturn as well as the uncertain course of the developed economies.

Good prospects for India

The World Bank’s findings confirm India’s leadership. Its GDP growth is likely to increase by 0.1% in 2017, attending a rate of 7.7%. Mainly the consumer sector contributes to this solid gain. In addition, consumption supporting civil service pay system reforms, higher expenses on infrastructure, the recovery of the agriculture, the positive contribution of exports and a resulting good climate for investments will presumably boost private investments in the medium term.

Challenges of South Asia

Nevertheless, the maintenance of leadership will be challenging to both India and South Asia. “Countries will need to activate the full potential of private investment and exports to accelerate economic activity further, reduce poverty and boost prosperity” remarks Anette Dixon, World Bank South Asia Region’s Vice President. The reasons for this are weak business cycles and a lack of interconnectedness of economic sectors, which unsettle investors. As a result, companies tend to focus on short-term profits that they spend on the payment of dividends, for instance. Moreover, the income gap and the region’s strong agricultural orientation remain challenging.

Paths to further growth

All points considered, private investments are the main economic growth drivers of South Asia. Their promotion and the mobilization of domestic funds play a key role in the future of the economic area in question. Apart from that, energy supply, infrastructure and improved regulations are essential for the support of investments, job creation and poverty reduction as pointed out by Martin Rama, World Bank South Asia Region’s Chief Economist.

Expenditures on production sites, machinery, and research and talent acquisition are needed. First and foremost, production creates employment opportunities, wages and demand, which in turn increases productivity and demand. Jobs and resources in the low-productivity primary sector have to be transferred to industrial and service sectors, while economic integrity must be strengthened. The latter is essential in order to reduce dependence on developed countries:  after all, their demand is sinking, making export-based economic growth difficult. In the end, production for global, regional as well as domestic markets is to be pursued.

Furthermore, the creation of a stable framework is crucial to economic restructuring. That does not only imply transparent bureaucracy, but also a tax system which encourages profit reinvestment and minimizes incentives for debt financing and debt erosion that hinders public investments. Simultaneously, SMEs should be granted access to adequate credits. Thus, strategic and pragmatic actions and decisions will ideally lead to high aggregate demand and a stable, competitive exchange rate.

When it comes to India, the main challenges are the adjustment of the progresses of poverty reduction to growth, the establishment of economic integrity and a stronger consideration of human development related to health, nutrition, education and gender. In short, India’s further development remains to be observed with suspense in the light of the newly passed GST bill. 

(Sources: World Bank, UNCTAD; Pictures: Julie-Ann Shiraishi)

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