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Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia
South AsiaIn 2000, the seven South Asian economies achieved generally healthy growth by virtue of a combination of factors, the most noteworthy of which were a strong recovery in agricultural production, rejuvenated export activities, an increase in private sector dynamism, and substantial price stability. India's economy grew at a rate of 6.0 percent in 2000, one of the best performances among developing member countries, led by the service sector which grew at over 8 percent. India continued to make rapid progress in developing the information and communications technology sector, which has played a major role in recent robust growth performance. Pakistan's GDP growth of 4.8 percent in 2000 was the highest since 1997, and was the result of a strong agriculture sector and an increase in exports. The year's outcome was quite encouraging in view of poor performance in recent years. Bangladesh also recovered well from moderate growth in 1999 when floods devastated the country. The pickup was mainly the result of a bumper crop, helping the country achieve self-sufficiency in food grain production for the first time in many years. Other countries in the subregion showed generally strong signs of recovery during the year, attributed largely to higher agricultural growth. Large fiscal deficits remained a concern in the majority of South Asian countries. The fiscal position of central as well as local governments generally showed no improvement despite continued efforts to stabilize annual budgetary shortfalls and restructure overall revenue and expenditure programs. Pakistan and Sri Lanka saw an increase in the fiscal deficit, mainly due to an overrun in defense expenditures. India's fiscal deficit contracted from 5.5 percent of GDP in 1999 to 5.1 percent. Inflation was generally kept under control in the subregion, although in India the wholesale price index rose to 7.0 percent in 2000 from 3.3 percent in 1999. Higher world oil prices were the primary cause of this spike. Bangladesh did well in control-ling consumer price inflation to only 3.4 percent, compared with substantially higher levels in previous years, thanks largely to greater availability of food items from the bumper harvest. Nepal also exhibited noteworthy stabilization in inflation for the same reason. In Bhutan, price developments were highly dependent on inflationary trends in India, while in the Maldives lower inflation resulted from better fiscal and monetary management. The export sector played a key role in the subregion's economic recovery. Following moderate growth of about 11.6 percent in 1999, India's exports improved further by about 17 percent in 2000, helped by faster global trade expansion and by depreciation of the rupee. Exports from Bangladesh recovered significantly due to improved foreign demand for ready-made garments and knitwear, its two key products. Sri Lanka's exports increased by 19.8 percent and the growth of exports in Pakistan was also strong at 8.4 percent. Because exports were buoyant in all the countries of the subregion, the majority of them held their current account deficits to around 2 percent of GDP or less. Macroeconomic forecasts for the next two years are cautiously optimistic, although the slowdown in the US economy will have an adverse impact on both economic growth and export performance. Nevertheless, the impact of the US slowdown will probably be less pronounced in this subregion than elsewhere in Asia, simply because it is less dependent on the US market. India is likely to show GDP growth of 6-7 per-cent in 2001 and 2002, and Bangladesh, Pakistan, and Sri Lanka of about 4-6 percent over the same period. Inflation is forecast to be modest, barring another steep rise in international oil prices and assuming that weather patterns are normal, contributing to solid agricultural performance. Exports from the subregion, except Bhutan and Sri Lanka are likely to show double-digit growth while imports will also be boosted by the import demand of export industries. This should lead to current account positions similar to those of 2000. The subregion faces many formidable challenges that could have serious repercussions for socioeconomic development if they are not addressed promptly. It has had persistently large fiscal imbalances that are a concern as they are the main reason for the crowding out of financial resources for the private sector, underdevelopment of the financial sector, and high credit costs. It is, therefore, crucial that governments ensure prudent fiscal management by reforming expenditure programs, broadening and modernizing the tax base, and reforming their tax administrations. All these measures have to be accomplished within a rigorously planned medium-term target aimed at a rapid reduction of the fiscal deficits. Another major issue is pervasive poverty. The subregion is home to more than half Asia's poor people. Poverty reduction efforts have not been successful in the past largely because of high population growth, insufficient GDP growth, low human development, and improper social assistance for the poor. Sustained vigorous reforms to address macroeconomic and social sector impediments are, therefore, critical if the subregion is to improve the people's welfare and accelerate socioeconomic progress. More rapid, equitable, and sustained economic growth should be pursued, since only this can increase the level of per capita income. However, certain microlevel antipoverty programs need to be simultaneously implemented for both rural and urban poor, with recognition of the large differences in underlying circumstances of the two groups. The countries in the subregion are faced with another major challenge, namely the need for diffusion and adoption of information and communications technology (ICT). While India has made significant efforts to this end in absolute terms, adoption rates are still far below those of many economies elsewhere in Asia. Other countries in South Asia have even further to go. Given that the overall economic activities today are increasingly ICT dependent and that ICT contributes to efficiency and productivity, the subregion needs to strengthen its efforts at adoption. To this end, educational reform, infrastructure development, and adequate financing are crucial. The seven countries need to strengthen subregional cooperation through higher levels of foreign trade and investment and improving joint natural resource management. Subregional economic relationships have not been cohesive due mainly to political factors, despite the many efforts of various subregional groupings. Stronger economic interaction, particularly among the countries' private sectors, will contribute to trade and industrial upgrading, as well as to economic growth and poverty reduction.
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