South Asia: The New Face of Emerging Economies

The World Bank reports that growth in South Asia has increased from 6.2% to 7.5% between 2013 and
2016. During the same period, the growth rate of developed economies remained stagnant at lower
rates in the range of 1% to 3%, and those of other developing nations (like BRICs, except for India)
remained flat or even turned negative. Amid sluggish global growth, the South Asian region has
emerged with consistent and strong performance.

This article explores the economic potential of the economies in South Asia, and what makes each of
these nations have the next high-growth potential.

South Asia: Less Vulnerable to Global Financial Turmoil

The South Asian region primarily comprises India, Pakistan, Bangladesh and Sri Lanka, as well as
smaller nations, like Nepal, Bhutan and Maldives.

While many of these economies have a considerable share of revenues from international exports,
domestic demand is expected to be the primary driver for growth in near future. Domestic
markets make these economies less prone to external vulnerabilities and global financial turmoil.

Almost all of these nations are net importers of commodities. Thus, while many energy-hungry
nations such as India have efficiently used the recent low cost of oil to stockpile huge inventories of
oil for future use, rising energy prices present long-term downside risks. Nations like Bangladesh have
emerged as major exporters of textile products and have benefited from lower prices of cotton.

At the same time, as most South Asian countries are not huge importers of finished goods: many are
involved in importing raw commodities to manufacture finished goods for export. This dampens the
prospective effects of trade protectionism. At the same time, cheaper imports have allowed
manufacturing of finished products at lower costs, offering competitive advantage for international
exports.

Cheaper commodities also assisted these economies with declining inflation, enabling governments
to focus on infrastructure development and move ahead with much-needed economic reforms.

The region generally has stable governments that have introduced supportive policies to facilitate
international investments and helped improve investor sentiment.

With increased capital inflows, the current account deficit of the majority of South Asian nations has
reduced. Though the currencies have declined against the U.S. dollar, the decline served beneficially
to generate more revenues from exports. The same assisted in building high forex reserves, as South
Asia received high inflows of remittances.
Future Projections
While the South Asian economies showed strong GDP growth from 6.2% in 2013 to 7.5% between
2013 and 2016, the World Bank estimates that momentum will subside in coming years before
regaining in 2019.

Country-Specific Accounts
India, the bellwether of the group, has successfully diversified its manufactured product base and
enhanced its production capabilities. It progresses with one of the highest growth rates, and could
fare even much better. Recently, India has managed to attract foreign investments, liberalized FDI in
key sectors like defense, real estate, railways and insurance, and progressed towards energy
efficiency. However, the hurdles in implementing key reforms, including a goods and services tax
(GST) and land acquisition bill, continue to pose impediments.

An aggressive cut in subsidies has released funds for development needs, and an increase in ventures
under public-private partnerships is also aiding the growth momentum.

The well-formulated “Make In India” campaign has started supporting local manufacturers, and
attracted multinational corporations and even nations to set up manufacturing facilities in India across
different industry and services sectors. A study by UK think tank the Centre for Economics Business
and Research (CEBR) suggests that “India could become the world's third largest economy after 2030,”
and together with Brazil it could lead to "France and Italy kicked out of the exclusive G8 group” in the
next 15 years. (For more, see India: A Bright Spot in Today's Global Investment Landscape.)

Pakistan continues to benefit from increased investments from China, and the return of Iran to
international markets is expected to boost mutual trade. Additionally, the China-Pakistan Economic
Corridor (CPEC) is expected to bolster the Pakistani economy through to 2030. According
to Dawn news, “The CPEC is a 3,000-km network of roads, railways and oil and gas pipelines
from Gwadar port (in Pakistan) to Kashgar city in north-western China’s Xinjiang Uygur autonomous
region.”

Bangladesh has emerged as a leading manufacturer of textile products. The forecast of increase in
domestic demand, hike in public sector wages, and increased construction activity will bolster its
economy in near term.

The smaller economies of Bhutan and Sri Lanka too have strong growth projections. Bolstered by
increasing foreign investments, Bhutan has embarked on building three major hydropower projects
to boost its industries and revenues, while Sri Lanka is going for policy reforms to boost its service
sector growth. Both these nations are also expected to benefit from high growth in the tourism sector,
which has so far remained untapped in its true potential.
While the majority of the global FDI investments are made in India, other South Asian nations are
gaining their share. For instance, China has increased its energy supplies in Nepal, port and logistics
construction in Sri Lanka, and infrastructure and production in Pakistan.

The risk profile for most South Asian nations is assessed to be low, as they are commodity importing
and their growth is forecasted to be driven by domestic demand. Risk primarily remains dependent
on domestic factors and can be mitigated at the individual level in a timely manner. For instance, India
faces delays in implementing reforms, Maldives has been running into challenges due to political
problems, Nepal continues to recoup the losses due to last year’s earthquake and recent political
transition by introducing a new constitution, while Pakistan continues to battle on the security front.

The Untapped Intra-region Potential

Though the large nations in the region, India and Pakistan, have successfully managed to increase their
trade share with East Asian and Sub-Saharan African nations in recent times, a lot of potential with
other developing nations across the globe still remains untapped for the entire region. The region as
a whole has remained closed to the rest of the world due to lack of economic integration.

These countries have limited business integration with each other, for various political and historical
reasons. The World Bank reports that “On average, India, Pakistan, Sri Lanka and Bangladesh’s exports
to each other amount to less than 2 percent of total exports.”

For instance, after Mexico-U.S. and Russia-Ukraine, the Bangladesh-India corridor ranks third in the
list of top migration corridors, which accounts for $4.6 billion remittances in 2015 between the two
nations. If the existing trade barriers are eliminated facilitating regulated trade flow, the untapped
potential can do wonders for this region.

The Bottom Line

With a projected growth rate of 6.2%, the South Asian region has all it takes to be the next bright spot
in the global economy. Though challenges remain due to political uncertainty, bureaucratic red tape
and security concerns, the potential can increase manifolds if the nations forego their historical and
geopolitical differences and present a collective front to emerge as an integrated economic
powerhouse.

India’s role
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, although more
volatile portfolio investments account now for a greater share of the total. 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 – something that
may well happen in the medium term.

“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.