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.