South Asia is the fastest growing region. Why are analysts concerned?

South Asia is expected to grow by 5.8% this year, according to the World Bank, making it the fastest-growing region in the world. However, analysts are worried that the current rate is unsustainable – even as growth remains below pre-pandemic levels.

First Look

South Asia is expected to grow by 5.8% this year, making it the fastest-growing region in the world even as the pace remains below pre-pandemic levels, the World Bank said on Tuesday.

The latest South Asia Development Update from the World Bank projected growth in the region to slow slightly to 5.6% in 2024 and 2025, as post-pandemic rebounds fade and reduced global demand weighs on economic activity.

At almost 6% this year, the region is growing faster than all other emerging markets, said Franziska Ohnsorge, the organization’s chief economist for South Asia.

“While high inflation and interest rates have bogged down many emerging markets, South Asia seems to be forging ahead,” the World Bank noted in its report.

Still, “for all of the countries here this represents a slowdown from pre-pandemic levels,” Ms. Ohnsorge said, adding that the growth wasn’t fast enough to meet various development goals set by countries in the region.

Despite the progress, the region still has a long way to go, the report said. Per capita incomes in South Asia are around $2,000 – one-fifth of the level in East Asia and the Pacific region. The current growth rates, while high, are not sufficient for South Asian nations to achieve high-income status within a generation, it said. Additionally, the growth is not necessarily equal.

India, which accounts for most of the regional economy, is set to remain robust with 6.3% growth in the 2023-24 fiscal year, while others like Maldives and Nepal are also expected to grow thanks to a rebound in tourism.

But things are bleaker in other countries. Bangladesh’s growth may slow to 5.6%, while projections for Pakistan’s growth – only 1.7% – are below the rate of its population growth, the World Bank said. Sri Lanka, whose economy collapsed last year, is recovering slowly from a severe recession, but the IMF last week held off from releasing a second tranche of a funding package after concluding that the country had failed to make enough progress in economic reforms.

The World Bank said another concern was that government debt in South Asian countries averaged 86% of GDP in 2022, which is higher than other emerging markets. It added the high debt could increase the risk of defaults and raise borrowing costs.

The region’s economic outlook could also be affected by the slowdown in China’s economy and is vulnerable to further shocks from natural disasters, which have become more frequent and intense due to climate change, the report said.

Ms. Ohnsorge said that governments in South Asia could improve fiscal conditions by seizing on opportunities for energy transition, which could create jobs, reduce reliance on energy imports, and cut pollution levels.

“Almost one-tenth of the region’s workers are employed in pollution-intensive jobs,” many of which are concentrated among informal and lower-skilled workers who are more vulnerable to changes in the labor market, the World Bank said. The region currently lags behind others in adopting energy-efficient technologies and creating more green jobs, Ms. Ohnsorge added.

The World Bank on Tuesday also released its latest India Development Update, which found that despite a challenging global economic environment, India was one of the fastest-growing major economies in the previous fiscal year at 7.2%. This put it as the second highest among the Group of 20 countries and was almost twice the average for emerging market economies, it said.

With global challenges expected to continue on the back of high-interest rates, geopolitical tensions, and sluggish global demand, overall economic growth is likely to slow in the medium-term. The World Bank forecasts India’s GDP growth for the current fiscal year to be 6.3%, attributing it mainly to external factors and waning pent-up demand after the COVID-19 pandemic.

This story was reported by The Associated Press.