Led by robust growth in India, South Asia shows resilience in the face of turbulent international markets and remains the fastest-growing region in the world, says a new World Bank report. According to South Asia Economic Focus, published twice-a-year, the region is likely to see its economic growth to gradually accelerate from 7.1 percent in 2016 to 7.3 percent in 2017. “The region’s economic performance prospects remain strong due limited exposure to global turbulence, coupled with increasing investment activity,” reads the report.

Nevertheless, the bank also cautions South Asian nation of fading tailwinds of the global economy. “Capital flows to the region have declined and remittances from oil exporting countries have started to weaken,” mentions the bank. “Fuel and food prices remain low but are unlikely to keep falling. As a result overall output growth is slower than previously anticipated and inflation has recently been creeping up.”

“South Asia has been resilient to global turbulence due to its limited exposure to slowdowns in other major economies coupled with the tailwinds of favorable 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.”

Many South Asian countries show potential for accelerated growth in the short to medium term, according to the report. “However, they should expect a more difficult global environment demanding well-managed domestic economies,” says the report. Given its weight in the region, India sets the pace for South Asia as a whole. The bank forecasts economic activity of India to accelerate from 7.5 percent in FY2016 to 7.7 percent in FY2017 based on the expectation of strong private investment, a push in infrastructure spending, an improved investment climate, and deleveraged corporate and financial balance sheets. The bank estimates the Nepali economy to grow by 1.7 percent in 2016 compared to 3.4 percent in 2015. The lower growth prospect is attributed to the last year’s earthquake followed by cross-border trade disruptions, as per the bank. “Disruptions increased inflation to double digits, affecting the welfare of the poor and vulnerable, while reducing revenue collection and slowing reconstruction efforts,” the report mentions.  Nevertheless, the bank expects the situation to normalised by the end of 2016, leading to strong rebound in 2017 with GDP expected to grow by 5.8 percent.

Similarly, the report forecasts Pakistan’s economic growth to accelerate modestly from 4.5 percent in 2016 to 4.8 percent in 2017 while Sri Lanka is expected to grow by 5.3 percent in both 2016 and 2017. The bank projects economic growth of Bangladesh to be 6.3 percent in 2016 and 6.8 percent in 2017 whereas, it forecasts Bhutan’s growth to be 6.7 percent in 2016 and 6.8 percent in 2017. Meanwhile, Maldives is expected to achieve GDP growth of 3.5 percent in 2016 and 3.9 percent in 2017.  Likewise, the bank estimates Afghanistan’s growth to increase marginally from 1.9 percent in 2016 to 2.9 percent in 2017. 

The report’s analysis of fiscal policy across the region suggests that governments need to find a balanced path towards fiscal consolidation. “Fiscal policy has a wide range of impacts for development. The fiscal deficit affects macroeconomic stability, capital expenditures are needed for growth, and taxes and social spending matter for equity,” said World Bank South Asia Chief Economist Martin Rama. “With the currently low oil prices, this is also an opportune time for South Asian policy makers to introduce or expand explicit carbon taxes. This would improve environmental and fiscal sustainability at the same time.”