What drives growth in South AsiaGrowth disparities within the South Asian region have remained wide with Bangladesh, India and Sri Lanka recording GDP growth of 6.5 per cent or higher, and Iran, Nepal and Pakistan registering growth rates of less than 4 per cent.
ECONOMIC growth in South Asia moderated in 2011, primarily owing to a slowdown of the Indian economy. After expanding by 7.2 per cent in 2010, real GDP is estimated to have grown by 6.5 per cent in 2011. The region is expected to remain fairly resilient to the global economic downturn and sustain its growth momentum in the outlook period. Driven by robust domestic demand, average growth is forecast to accelerate slightly to 6.7 per cent in 2012 and 6.9 per cent in 2013. Private consumption and investment continued to be the main growth drivers in the region, with domestic demand supported by strong agricultural output and robust remittance inflows. Strong exports, particularly in the first half of the year, and a solid expansion of Government spending also contributed positively to growth. However, growth disparities within the region remained wide with Bangladesh, India and Sri Lanka recording GDP growth of 6.5 per cent or higher, and the Islamic Republic of Iran, Nepal and Pakistan registering growth rates of less than 4 per cent. India's economy has slowed over the past year as monetary policy was tightened in order to bring down inflation. With domestic demand moderating, GDP growth is estimated to have declined from 9 per cent in 2010 to 7.6 per cent in 2011. Assuming a gradual easing of inflationary pressures and an end to the monetary tightening cycle, growth is forecast to increase slightly to 7.7 per cent in 2012 and 7.9 per cent in 2013.
Buoyant domestic demand and a recovery in exports underpinned strong growth in Bangladesh and Sri Lanka in 2011. In the Islamic Republic of Iran, Nepal and Pakistan, long-standing structural problems such as weak policy implementation, security concerns and low investment in physical and human capital constrain growth. In all three countries, economic conditions are expected to improve slightly in the outlook period, but growth will remain well below potential. Unemployed women The latest labour force surveys in South Asia provide a mixed picture. While the employment situation in the fast-growing economies of India and Sri Lanka has improved, it remained weak in other parts of the region, notably in the Islamic Republic of Iran and crisis-ridden Pakistan. In Sri Lanka, the unemployment rate declined to an all-time low of 4.3 per cent in early 2011 on the back of a strong expansion in the services and industry sectors. By contrast, in the Islamic Republic of Iran and Pakistan, sluggish growth over the past few years has had a negative impact on employment. The average unemployment rate has increased in the Islamic Republic of Iran from 11.9 per cent in the fiscal year 2009-2010 to 14.6 per cent in 20'10-2011 and in Pakistan from 5.6 per cent in the fiscal year 2009-2010 to 6.0 per cent in 2010-2011. In addition to elevated unemployment rates, South Asia's labour markets face deep-rooted structural challenges, such as the highest share of vulnerable employment among all developing regions and widespread youth unemployment. Moreover, in all countries of the region, unemployment rates among women are far higher than among men. Consumer price inflation remained high across South Asia in 2011, presenting a major challenge for policymakers. Regional inflation averaged 10.3 per cent, down only slightly from 11.6 per cent in 2010 and ranging from 7.0 per cent in Sri Lanka to 17 per cent in the Islamic Republic of Iran. The increases in consumer prices were driven by a variety of factors, including higher international food and energy prices, domestic supply shortages, the reduction of fuel subsidies in several countries (including the Islamic Republic of Iran) and buoyant demand conditions in Bangladesh, India and Sri Lanka. In the outlook, inflation is projected to decline slowly, averaging 9.1 per cent in 2012 and 8.0 per cent in 2013, as pressure from higher food and commodity prices eases and the impact of monetary policy tightening is felt in Bangladesh and India. However, there are substantial upside risks to inflation, including renewed supply shocks such as insufficient monsoon rains and a rise in international commodity prices. Tightening cycle ends Facing high and persistent inflation, several central banks in South Asia, most notably the Reserve Bank of India, continued to tighten monetary policy in 2011. However, with risks to the world economy again rising, the focus of monetary authorities has started to shift towards supporting domestic demand. The Reserve Bank of India signalled an end to the current tightening cycle in October 2011 after hiking its key policy rates for the thirteenth time since early 2010. In Pakistan, a slowdown in inflation during the third quarter of2011 led the State Bank to cur its main policy rate from 14 per cent to 12 per cent in an attempt to stimulate private investment and growth. Bangladesh Bank by contrast, stepped up measures to contain accelerating inflation, lifting interest rates and restraining credit flows, especially to sectors considered unproductive. Looking ahead, central banks are likely to continue to move towards a growth-supportive monetary policy if inflationary pressures ease. Despite some progress in recent years, fiscal deficits continue to be high in most South Asian countries, particularly in India, Pakistan and Sri Lanka. Government spending rose significantly in 2011 as development expenditures (such as education, health and infrastructure spending), non-development expenditures (such as civil service pay and defence spending) and interest payments increased. High Pak deficit Pakistan recorded a deficit of about 6 per cent of GDP in the fiscal year 2010-2011, missing the International Monetary Fund (IMF) target of 4.7 per cent. This can be mainly attributed to the devastating floods in 2010, higher security expenditures and failed efforts to implement a general sales tax due to domestic political opposition. India's fiscal deficit declined to 5.1 per cent of GDP in the fiscal year 2010-2011, as strong growth boosted tax revenues and the sale of 3G telecommunications licences increased non-tax revenues. However, India's Government is unlikely to reach the deficit target of 4.7 per cent of GDP for the fiscal year 2011-2012, as slowing growth is leading to a shortfall in tax revenues and the disinvestment of stakes in State-run companies is put on hold. After recovering rapidly in the first half of 2011, South Asia's export sectors experienced a moderation in demand owing to deteriorating conditions in developed economies. Nonetheless, in most countries of the region, total export earnings in 2011 were about 20 per cent higher than a year ago. Bangladesh, Pakistan and Sri Lanka benefited from a strong recovery in demand for textiles and garments, partly as a result of significant cost increases in China and political turmoil in North Africa and Western Asia. In India, exports of engineering goods, petroleum products, gems and jewellery soared. High oil and commodity prices and strong domestic demand boosted import spending in 2011, notably in Bangladesh, India.and Sri Lanka. Since, in most countries, imports had started from a higher base than exports, merchandise trade deficits widened further in 2011. This was partly offset by improvements in the services balance and higher current transfers, although workers' remittances grew at a slower rate than in previous years. In 2012, export growth is likely to decelerate, resulting in a further widening of trade deficits in most countries. A prolonged recession in Europe could have a significant impact on growth across South Asia as European countries continue to be a key export market for the region and a main source of tourism revenues. Renewed increases in international commodity prices also represent a risk for South Asia, as this would complicate fiscal deficit reduction and monetary policy decisions while also leading to a widening of current-account deficits |
Monday, October 15, 2012
ECONOMIC growth in South Asia
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