Catalog

	Table of Contents
p. 14 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World Developing Asia and the Pacific: Performance and Prospects Prospects for the World Economy in 2006-2007 Subregional Summaries Central Asia East Asia South Asia Southeast Asia The Pacific Textiles and Clothing in the Post-Quota Era: The Outlook for Asian Suppliers The Doha Development Agenda: Asian Challenges and Prospects after the Ministerial Meeting in Hong Kong, China II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Statistical appendix

Asian Development Outlook 2006 : I. Developing Asia and the World : Subregional Summaries

---

South Asia

Economic performance

South Asia's GDP growth is estimated to have reached 7.8% in 2005, which is higher than the projected growth of 6.7% in ADO 2005 and the subregion's actual growth rate of 7.2% in 2004. The higher growth was driven by the strong performance of the Indian and Pakistan economies. In fact, the majority of countries performed better than in 2004 (the exceptions were Bangladesh, Maldives, and Nepal) (Figure 1.3.3).

India has been able to maintain its high growth momentum with an 8.1% expansion of GDP in 2005, significantly above trend and 0.6 percentage points higher than in 2004. The broadly favorable monsoon and robust growth in the industry and services sectors consolidated high growth. Aggregate demand was strong, private sector investment picked up, and consumer spending remained buoyant.

The Pakistan economy registered impressive economic growth of 8.4% in 2005, the highest in the last two decades and 2 percentage points above the previous year. Private consumption increased by 16.8% in real terms, and led GDP growth for the second consecutive year. However, for the first time in 4 years, the balance of payments was in deficit.

Bangladesh experienced a decelerating GDP growth rate of 5.6% in 2005. Still, it was above trend, despite devastating floods, escalating international oil prices, and the end of textile and clothing quotas. Steady expansion in industry and services continued to support growth. The strong increase in workers' remittances virtually matched the increase in the cost of petroleum imports, but a larger trade deficit moved the current account balance to a deficit.

Growth of the formal economy in Afghanistan again reached double-digit levels (estimated at 13.8% in 2005) as higher rainfall pushed agricultural output higher. The reconstruction effort kept rapid growth rolling in the construction, trade, transport, and telecommunications sectors. It was also the first time since 2001 that opium production declined, though only slightly. The country is undertaking slow, but measured, sound macroeconomic policy and structural reforms.

Sri Lanka's GDP growth at 5.7% in 2005 was higher than trend and better than the previous year, despite the devastating Asian tsunami of December 2004. The engine of growth was nontourist-related services industry (import-related trade, telecoms, and financial services). The end of the quota system did not generate a large number of bankruptcies and closures in the textile industry (as earlier feared), but export growth still slowed sharply, to 3.1%. The trade gap widened with oil payments accounting for 50% of the overall growth in imports in 2005.

Nepal's economic performance declined largely as the result of domestic insurgency and strikes. Light monsoon rains brought down paddy production, adding to price pressures that brought up annual average inflation to 4.5%. The tourism industry also saw a downturn because of the conflict. GDP grew by only 2.3%. The economy of the Maldives contracted by an estimated 5.5% in 2005, primarily due to a reduction in tourism as a result of tsunami-related damage. Increased expenditure associated with the restructuring of the Government raised the budget deficit. The external current account deficit is projected to have increased to about 40% of GDP. Bhutan's economic growth remained strong and was estimated at 8.8% for 2005, with construction of a major hydropower project the major economic driver.

Prospects for 2006 and 2007

South Asia's growth is projected to moderate to 7.3% in 2006 as a result of some slowing in India and Pakistan. Bangladesh, Bhutan, and Maldives are projected to achieve higher economic growth than the previous year. In 2007, the subregion's growth rate is forecast to rise to 7.5%, when India and Pakistan are seen resuming their recent growth trajectory.

India's economy is likely to continue its high-growth trend, though expansion is expected to slow to 7.6% in 2006 before picking up to 7.8% the following year. Both the industry and services sectors should maintain strong growth. Import growth is likely to slow but still outpace export expansion, thereby increasing the current account deficit to about 3% of GDP in 2006. Inflation is set to pick up to 5.5% in 2006, reflecting the need to raise domestic prices of petroleum products to eliminate large subsidy costs.

In Pakistan, economic growth of 6.5% is in prospect for 2006, about 2 percentage points weaker than 2005, but still robust. After an unusually strong gain in 2005, agriculture is expected to grow by only 3.0% in 2006, reflecting smaller cotton and sugarcane crops. High domestic oil prices will also limit economic growth, as will (to some extent) the effects of the 8 October earthquake.

Economic prospects in Afghanistan are favorable, with GDP growth estimated at 11.7% and 10.6% in 2006 and 2007, respectively. This good performance is projected on the basis that another drought does not hit agricultural production. The current account deficit (excluding grants) is projected to improve as grant aid tapers down while the deficit (including grants) increases slightly, reflecting somewhat greater foreign direct investment and public loan inflows. In Bangladesh, GDP growth is projected to increase to 6.5% in 2006 as a result of strong domestic and external demand. Healthy private consumption and buoyant workers' remittances will continue to underpin growth. However, growth is seen moderating to 6.0% in 2007 amid the political uncertainty of the January 2007 election.

Economic growth in Sri Lanka will likely decline somewhat to 5.3% in 2006 and 5.2% in 2007, which is in line with the country's long-term economic growth trend. The private sector will continue to buttress growth, especially in textile and clothing manufacturing and in services. Nepal's economic outlook includes a modest pickup in economic performance. GDP growth is projected to be 2.0% in 2006 and 3.4% in 2007. The low growth rates reflect the continuing domestic conflict; political instability; a slowdown in reform momentum; and growing polarization between the Government on the one hand, and the political parties and the insurgents on the other. In the Maldives, prospects are for an economic recovery to 9.0% growth in 2006 (but deceleration to 6.0% the following year). Persistence of the fiscal crisis that began in 2005 and a drop in foreign exchange reserves constitute significant risks over the next few years.

Bhutan's GDP growth is expected to accelerate to 10.0% and 12.0% in 2006 and 2007, respectively. The completion of the Tala hydroelectric project, which is being brought online in March through June this year, will substantially boost exports and the country's budget revenues.

South Asia's export growth decelerated in 2005 to 14.9% from 21.4% in 2004. With the exception of Afghanistan and Pakistan, all countries in the subregion registered lower export growth. Subregional import growth also decelerated, to 28.2% from 40.5% in 2004. The current account deficit on the balance of payments widened sharply to 2.3% of GDP. India's current account deficit increased to 2.5% of GDP. It is expected that in 2006, the subregion's balance-of-payments deficit will increase to 3.0% of GDP.

Average inflation for South Asia in 2005 moderated to 5.3%, from the high of 6.2% in 2004. However, Pakistan and Sri Lanka experienced substantial increases in inflation in 2005. Adjustments in domestic prices of petroleum products (to dilute or remove subsidies) will likely be the main factor lifting the subregion's inflation rate to 6.1% in 2006, even in a context of tightening monetary policy. Countries with high inflation in 2005 (Afghanistan, Pakistan, and Sri Lanka) should be able to reduce inflation somewhat, but inflation in Bangladesh, India, and Nepal will likely rise.

Medium-term outlook

The medium-term outlook for growth in India is for GDP to expand by 8—8.5% over 2006—2010. This will require a sizable pickup in gross fixed capital formation from about 26% to 30% of GDP and making substantial improvements in the physical infrastructure. In addition, various structural changes are required to improve the investment environment. The main imperatives are to direct greater investment into agriculture to raise productivity and living conditions for the rural poor, and to rapidly expand manufacturing industry to generate much-needed employment opportunities and underpin strengthening in the balance of payments.

Pakistan faces similar challenges. However, planned substantial public sector investment in agriculture and private investment in mechanization should continue to boost incomes, productivity and growth in the sector. Capacity expansion, balancing, and modernization in key industries (such as textiles and clothing) will also need to be sustained. Greater investment, particularly in the infrastructure sector, is a key challenge.

Substantial progress has been made in recent years in structural reform that have been supported by international financial institutions. Despite this, medium-term economic prospects in Afghanistan, Nepal, and Sri Lanka rest heavily on achieving solutions to political conflicts that threaten to retard development. Bhutan's economy will remain dependent on the performance of hydropower.

Back East Asia	Next Southeast Asia