Driven by India's expected GDP growth of 7.7 per cent in 2017 and 7.5 per cent in 2016, the World Bank today forecasted gradual acceleration in South Asia's economic growth from 7.1 per cent in 2016 to 7.3 per cent in 2017.
Given its weight in the region, India sets the pace for South Asia as a whole, the World Bank said in its latest twice-a-year South Asia Economic Focus report.
India's economic activity is expected to accelerate from 7.5 per cent in FY 2016 to 7.7 per cent in FY 2017 based on the expectation of strong private investment, a push in infrastructure spending, an improved investment climate, and improved corporate and financial balance sheets, it said.
"South Asia has been resilient to global turbulence due to its limited exposure to slowdowns in other major economies coupled with the tailwinds of favourable oil prices, capital flows, and remittances," said Annette Dixon, World Bank South Asia Vice President.
"However, fiscal and financial vulnerabilities remain and countries should strive to address them through generating revenue and creating more fiscal space," it said.
According to the report, the GDP growth in India will be supported by a rebound in agriculture and stimulus from civil service pay reforms.
However, delays in the adoption and implementation of key reforms could affect investor sentiment, it said.
Favourable overall trends mask important underlying divergences: between urban and agricultural households; between domestic and external demand; and between public and private capital expenditure, which should be addressed, it noted.
In neighbouring Pakistan, growth is projected to accelerate modestly from 4.5 per cent in 2016 to 4.8 per cent in 2017, supported by growing industry and services and greater investment as well as buoyed by low oil prices and substantial remittances.
For sustained growth, Pakistan needs to address power cuts, a cumbersome business environment, and low access to finance through the successful implementation of tax and energy reforms, the report said.
In Sri Lanka the economic growth is expected to grow at 5.3 per cent in 2016 and 2017 driven by increased public investment and postponed investments in 2015.
The challenging global environment has taken a toll on the economy with reduced exports and remittances; and significant capital outflows, leaving Sri Lanka with higher public debt, lower reserves and rising inflation, it said.
Consumption was supported by lower energy costs, public
sector salary and pension increases, and favourable monsoon rains, which boosted urban and rural incomes, it said adding that economic activity also benefited from a pickup in foreign direct investment (FDI) and an increase in public infrastructure spending.
"Unexpected "demonetisation'-the phasing out of large-denomination currency notes which were subsequently replaced with new ones-weighed on growth in the third quarter of FY2017," the World Bank said.
Weak industrial production and manufacturing and services purchasing managers' indexes (PMI), further suggest a set back to activity in the fourth quarter of FY2017, it added.
"For the whole of FY2017, growth is expected to decelerate to a still robust 7.0 per cent."
In its report, the Bank said there has been slowdown in investment in South Asia.
"In India, gross fixed capital formation has been on a downward trend since 2011, with a shift in the composition from private to public," it said.
While public investment rose by 21 per cent in FY2016, private investment (which accounts for two-thirds of the total) contracted by 1.4 per cent, reducing overall investment growth to four per cent.
Infrastructure demand is expected to go up to USD1 trillion under the 12th Five-Year Plan (2012-2017).
"Going forward, public and private investment should be supported by higher allocations in the FY2017 federal government budget to build and upgrade infrastructure, and the setup of a USD3 billion National Investment and Infrastructure Fund," it said.
According to the Bank, India's steep private investment slowdown has been attributed to several factors. The need to unwind excess capacity built during the pre-financial crisis growth boom amid weak external demand (eg in the manufacturing sector) has discouraged new projects and caused investors to shelve existing projects, it said.
"Second, policy uncertainty has been a factor," it said.
For example, the stalled Land Acquisition Bill has extended project development timelines.
Lack of federal and state government coordination, on compensation for land acquisition and environmental clearances, has contributed to cost and time overruns.
Also lenders have been less willing to finance overleveraged corporates, especially in infrastructure related sectors (eg power and other utilities, steel, and cement firms).
In particular, the Reserve Bank of India's 2015 corporate governance reforms in state-owned banks (which represent two-thirds of the total banking sector lending) has adversely affected lending to leveraged corporates and conglomerates, the report said.
