Emerging Economies in South Asia

A period of robust growth lifted the economies of many South Asian countries, leading to notable increases in health, education, and living standards. A series of setbacks pushed this part of the world into an economic slowdown. Russia’s invasion of Ukraine, the floods in Pakistan, an economic crisis in Sri Lanka, and the lingering effects of the COVID-19 pandemic impacted the region.

South Asia: An Overview

South Asia is a subregion of Asia. Anchored by the Indian subcontinent, it includes India, Pakistan, Bangladesh, Sri Lanka, Nepal, the Maldives, and Bhutan. In some cases, Afghanistan is also considered part of the region.

Most of the region’s economy is driven by India, thanks to the rise of the middle class and the booming technology sector. India has become a primary source of labor as tech companies set up offices in the country, including LinkedIn and Google. This is in conjunction with the rise of various domestic industries, such as agriculture and textile manufacturing.

Many of these economies have a considerable share of revenues from exports. Nations like Bangladesh are exporters of textiles and benefit from low cotton prices. Domestic markets have historically made these economies less prone to external vulnerabilities and global financial turmoil. Most nations are net importers of commodities, allowing them to manufacture finished goods for export.

Afghanistan

Afghanistan has one of the lowest growth rates of all South Asian countries. This is due to security risks, political tension, and the Taliban’s control. Foreign aid after the Cold War allowed for some degree of infrastructure development.

The country’s economy shows signs of contraction with a troubled Afghanistan financial sector. Following the August 2021 political upheaval, the economy has shrunk by 25% over two years and remains fragile, relying heavily on external support.

Bangladesh

Bangladesh gained independence from Pakistan in 1971 and has developed significantly since then. Known primarily as a leading manufacturer of textile products, the country has seen rapid economic growth. This is due to high volumes of remittances and its efforts to reduce poverty and develop its infrastructure.

Some challenges may hinder the country’s economic potential, including rising commodity prices and inflation. Job creation is necessary to help Bangladesh achieve the status of upper-middle-income by its 2031 target. Doing so would require several initiatives, including educating its labor force and reshaping its business environment. Another key is moving beyond its dependence on ready-to-wear clothing exports into other areas of manufacturing.

Bhutan

Bhutan is a small landlocked country in the Himalayas between China and India. Its monarch, King Jigme Singye Wangchuck, created the term gross national happiness in 1972. The country has untapped potential for hydropower because of its water resources. Much of its excess hydropower is sold to neighboring India.

The economy relies heavily on tourism. There are initiatives to fight poverty, boost gender equality, and improve education. The economy was affected by the series of external shocks of the COVID-19 pandemic and the global ramifications of Russia’s invasion of Ukraine. The economy grew by 4.6% percent in FY22/23, supported by the reopening of borders for tourism in 2022.

India

India is considered a bellwether of South Asia and is the world’s largest democracy. The country successfully diversified its manufactured product base and enhanced its production capabilities. It is also considered one of the world’s largest technology hubs. India managed to attract foreign investments, liberalized foreign direct investment (FDI) in key sectors like defense, real estate, railways, and insurance, and progress toward energy efficiency.

An aggressive cut of subsidies in India has released funds for development needs, and an increase in ventures under public-private partnerships, such as in renewable energy, adds to the momentum. The well-formulated Make In India campaign supports local manufacturers and attracts multinational corporations.

According to the Centre for Economics Business and Research, India “could become the world’s third-largest economy after 2030.” The think tank also suggested that India and Brazil could replace France and Italy in the Group of Eight (G8) in the next 15 years.

Maldives

The Maldives is a group of about 1,200 coral islands in the Indian Ocean, averaging about one to two square kilometers in size. The country’s inhabitants are spread across only 185 of them.The country’s gross domestic product (GDP) growth is primarily driven by strong tourism, especially from Europe, China, and India.

This makes it particularly susceptible to economic shocks during times of distress. Despite slow progress on public infrastructure projects and falling gross foreign reserves, the Maldives forecasts strong growth, however, as a heavily import-dependent economy, the Maldives faces significant external and inflationary pressures due to the sharp rise in global commodity prices in 2023.

Nepal

Nepal is primarily located in the Himalayas between China and India. The country was led by a monarchy until 2008 when its citizens voted to abolish the 240-year-old ruling class to establish a democratic republic.

The country has a rich history of agriculture, especially in rice production. In Nepal, the industry continues to advance with increased electricity production and strong consumer demand, including a hydropower plant to encourage private sector investment. In 2018, a historic transformation occurred in Nepal, as a new government took office.

Growth is expected to rebound in FY24 and FY25, supported by the lifting of import restrictions and the gradual loosening of monetary policy.

Pakistan

Pakistan neighbors India to the west, Iran to the east, and Afghanistan to the south. The Muslim-majority country has lagged behind the growth experienced by India but has drastically helped lift millions out of poverty.

Its growth is characterized primarily by private and government consumption. Although it has benefited from investment, primarily from China and exports, the country has gone through a series of economic crises. Much of this has been due to political instability and floods.

The China-Pakistan Economic Corridor, a 3,000-kilometer network of roads, railways, and oil and gas pipelines from Pakistan to China, is expected to bolster the Pakistani economy through 2030.

Sri Lanka

The island nation of the Democratic Socialist Republic of Sri Lanka is located off the southeastern coast of India. Its Sri Lankan rupee-based economy has traditionally been boosted by its travel and tourism industry, exports of agricultural products like rice and tea, along with textile production.

Despite the end of a decades-long civil war, the country remains susceptible to political tensions and financial imbalances. There were efforts to reduce poverty, amplify growth, and boost its private sector but issues with credit rating reductions and its central bank’s loosening of monetary policies pushed these initiatives back.

South Asia’s Economy

After 2009, sustained economic growth in South Asia proved to be a boon to investors who were looking for new places to boost their investment returns. Between 2010 and 2018, the subcontinent’s economy expanded faster than the “global average of 3 percent,” according to the Council on Foreign Relations.

The growth was largely due to the economic conditions in India. The country’s efforts to lift millions out of poverty through education and business opportunities, develop infrastructure, and increase exports led to it becoming one of the fastest-growing economies in the world. Bangladesh’s position in the global market as a manufacturer of textiles and Chinese investment in countries like Pakistan help shape their economies.

Individual countries in the area have had their fair share of economic crises. For instance, Sri Lanka is dealing with issues with its balance of payments and incredible debt taken after the civil war ended. A massive amount of this debt is held by lenders in China, India, and Japan. In 2022, the country’s economy collapsed, thanks to years of government mismanagement and hyperinflation along with the devaluation of its currency.

Political Instability

This area is rife with political problems. Afghanistan is dealing with the aftermath of the withdrawal of American troops, leaving large factions of the country at risk of being taken over by the Taliban.

Ongoing political tensions and the rivalry between Pakistan and India may also hinder growth, as the two continue to fight over control of the disputed northern state of Jammu and Kashmir. Nepal has seen a rise in Maoist revolt against the federal government.

Climate

Pakistan and Nepal both suffered tremendously following natural disasters. Floods ravished Pakistan in 2022, leaving millions homeless and without proper drinking water. The damages were estimated to be more than $14.9 billion with economic losses topping that figure at $15.2 billion. Experts say it would take years to recoup the losses and regain some sense of normalcy.

Earthquakes have hit Nepal but none were as impactful as the one that took place in 2015. The economic impact of the 7.8 magnitude shock, which killed more than 9,000 people, was estimated to be half of the country’s GDP.

Future Projections

Things remain uncertain in South Asia, and growth is expected to dampen despite some changes for the better. Pakistan’s efforts to recover from the 2022 floods and rising commodity prices will continue to be challenging for the region. Growth is expected to slow in 2024 and 2025 as monetary tightening, fiscal consolidation, and reduced global demand impact economic activity.

The Bottom Line

The economy of South Asia is expected to grow in 2023 but then slow. The region, which includes Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka, faces monetary tightening and reduced global demand which weighs on economic activity.