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'Better than expected'

Srinivas MazumdaruSeptember 25, 2014

India and neighboring South Asian countries are expected to speed up economic growth, according to a new report, which forecasts faster than projected economic expansion in the region.

Asian Development Bank LOGO SCHILD
Image: picture-alliance/dpa

After two years of below five percent economic growth, South Asia's largest economy is showing "new promise of a turnaround," a newly released report by the Asian Development Bank (ADB) said. After a decisive victory for Narendra Modi's Bharatiya Janata Party in this year's general election, the bank expects India's annual economic growth to jump to 5.5 percent this year and to 6.3 percent in 2015.

The authors of the report, titled Asian Development Outlook 2014 update, said that India's new administration is better positioned to introduce reforms to "unlock the economy's potential" by stimulating investment and dealing with other fiscal and structural problems.

Recent measures such as easing environmental and forest clearances for mines, roads, power stations, and irrigation systems, among others, will also help speed up the implementation of ongoing projects, the report added.

On a growth path

Experts believe the Indian economy will show a gradual recovery over the next two years. According to Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, the expected recovery is linked to reforms announced by PM Modi designed to support India's flagging economy.

Indien Premier Minister Narendra Modi
ADB says Modi administration is better positioned to introduce reforms to unlock India's economic potentialImage: Reuters

These measures include "accelerating the pace of infrastructure project approvals and trying to boost foreign investment inflows from key trade and investment partners including the US, Japan and China," the economist told DW.

The ADB expects South Asia as a whole to expand by 6.1 percent in 2015 - an increase of 0.3 percentage points over the previous estimate. It also raised the growth forecast for this year from 5.3 to 5.4 percent, saying that it reflects "strengthening in Bangladesh and Pakistan on higher exports and remittances."

Chronic problems

In the case of neighboring Pakistan, the ADB hiked the projected expansion rate for 2015 from the original figure of 3.9 percent to 4.2 percent. It noted that the country had seen some economic progress in fiscal year 2014 due to reforms initiated by the nation's government as well as improvement in the energy supply.

"The continuation of economic reforms and efforts to improve the security environment would improve business confidence and help revive private investment," the paper underlined.

Pakistan Protest 1.9.
Leather says there are plenty of other factors that are holding back Pakistan's economyImage: Reuters

But Gareth Leather, Asia Economist at the UK-based economic research consultancy firm Capital Economics, expects Pakistan's GDP growth to remain stuck at around 3 to 3.5 percent for the next couple of years. Even if the security situation were to improve, there are plenty of other factors that hold back Pakistan's economy, he said.

For instance, the country faces a chronic energy crisis and companies there "suffer bigger losses from electricity shortages than in any other major economy in Asia," Leather told DW, adding that other reasons for investors' reluctance to set up factories in Pakistan are "a nightmarish bureaucracy, a lack of government effectiveness and rampant corruption."

Boosting investment

Bangladesh is another major country in South Asia whose expansion rate has been revised upward. The report points out that despite widespread political turmoil in the country ahead of its national elections, the country's GDP still grew at 6.1 percent in fiscal year 2014. The bank now expects a boost to private consumption on the back of an increase in foreign remittances and exports. Bangladesh's growth for 2015 is therefore projected at 6.4 percent.

Garments exports remain a key contributor to the country's economic growth, despite challenges faced by the industry due to increased regulatory standards by international textile manufacturers, Biswas said.

Näherin Textilverarbeiterin Bangladesch billige Kleidung
Biswas: 'Garments exports remain a key contributor to the Bangladesh's economic growth'Image: Reuters

"In order to boost the investment climate further, the government will need to further strengthen regulatory and safety standards for key sectors such as garments, as well as improving key infrastructure such as power, airports and railways," he added.

The ADB's growth estimate for Sri Lanka remained unchanged at 7.5 percent.

Less integrated

Alongside its economic outlook report, the bank also published another report on Asian nations' integration into global value chains (GVCs). "By thinking in terms of competitiveness in specific stages of production rather than over the entire production process, countries can boost their income growth and employment by linking to dynamic GVCs," said ADB Chief Economist Shang-Jin Wei.

But the bank concludes that few countries in South Asia and Central Asia "have found their GVC niche," while East and Southeast Asian nations generate the bulk of the Asia's GVC trade. The reasons for these economies to lag behind others, the ADB says, include high trade barriers, underdeveloped transport infrastructure, and regulatory hurdles, among others.

China Wirtschaft Fabrik Produktion
South Asia remains much less integrated into global manufacturing supply chains than other regionsImage: Reuters

Experts say that South Asia remains much less integrated into global manufacturing supply chains due to the low value-added nature of much of their exports and their lack of competitiveness with East Asian manufacturing hubs. This reflects a broad range of problems, including political uncertainties as well as the weak business climate and poor infrastructure, noted Biswas.

"While India, Sri Lanka and Bangladesh need to make significant progress in reducing red tape and improving infrastructure in order to become more competitive industry hubs, Pakistan faces a far greater challenge due to the high level of political risk and instability overlaid on top of weak macroeconomics," the economist said.