"From an expected 5 percent, Gross Domestic Product (GDP) growth is expected to drop to 3.4 percent this year," it said. "But the economic growth will tick up to 3.7 percent in 2016," the multilateral institution said in its twice-a-year 'South Asia Economic Focus' published on Sunday. "Although macroeconomic fundamentals remain strong, weak execution of public investment slows down both infrastructure development and post-disaster reconstruction."However, the World Bank is hopeful that many South Asian countries show potential for accelerated growth in the short to medium term. The transition in Afghanistan, the earthquakes in Nepal, and revisions to national accounts in Sri Lanka, have resulted in all three countries experiencing slower growth than previously expected, it added. "Led by a resilient India, South Asia is expected to maintain its lead as the fastest-growing region in the world, with economic growth forecast to accelerate from 7 percent in 2015 to 7.4 percent in 2016," the report stated.
But the positive performance hinges on solid growth in services, domestic consumption, and a gradual rise of investments, the report says. Limited exposure to financial turmoil and an improved external position have given most South Asian countries important policy space, it added.
Given India's weight in the region, its performance greatly influences the projections for South Asia as a whole. Improved investor sentiment and resilience to external shocks are expected to increase India's growth rate to 7.5 percent in fiscal year 2015 and further to 7.8 percent in the fiscal year 2016.
"While the region is now in a position of strength, structural constraints holding back export and investment growth do persist," World Bank South Asia Chief Economist Martin Rama said, adding that to keep the momentum and accelerate job creation, governments should enact reforms easing infrastructure bottlenecks and paving the way to greater competitiveness. "Fiscal space remains limited while financial sector vulnerabilities persist."
Thanks to low food and commodity prices, as well as slowdown in the growth of administered prices, inflationary pressures have eased markedly in South Asia, the report added. "Yet the pace of disinflation varies depending on the price index considered. Revisions to national accounts, together with new comparable data on purchasing power around the world, also raise questions regarding the measurement of prices in the region."
According to the report, South Asia could actually have cheaper prices, faster growth and bigger economies than previously thought. "Rapid growth has not yet translated into significantly higher government revenue generation and improved fiscal balances. Budget deficits are expected to remain at 6.5 percent of GDP in 2015, the highest among all developing regions. Tax collection remains well below estimates, and has even deteriorated across major South Asian economies," it added
Annette Dixon, World Bank South Asia Vice President, said mobilizing revenue is critical for the region to develop its infrastructure and deliver better social services, while creating a financial cushion to address potential shocks in the future. "In some cases introducing and rolling out modern tax instruments holds the key to higher revenue, but containing exemptions and special regimes are crucial across most of the region," she added.
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