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Head South for Asia’s New Economic Powerhouse

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Pacific Money

Head South for Asia’s New Economic Powerhouse

The World Bank pegs South Asia as a “global growth hotspot.”

Head South for Asia’s New Economic Powerhouse
Credit: Wikimedia Commons/ wili hybrid

Move over, China. Led by India, South Asia has shrugged off a soft global economy to cement its position as the world’s fastest growing region, and could increase its lead next year, according to the latest reports.

On Monday, the World Bank said economic growth in South Asia would expand from 7.1 percent this year to 7.3 percent in 2017, driven by the world’s fastest growing major economy, India.

According to the Washington-based institution’s “South Asia Economic Focus,” the region remains a “global growth hotspot,” having proved resilient to headwinds including China’s slowdown, “uncertainty around stimulus policy in advanced economies,” and slowing remittances from overseas workers.

India, the world’s seventh-largest economy, continues to set the pace for the region and is expected to see growth strengthen from 7.6 percent in 2016 to 7.7 percent next year, aided by a rebound in agriculture, civil service pay reforms, and accelerated infrastructure spending over the medium term along with “a better investment climate” helping investment and exports.

“However, India faces the challenge of further accelerating the responsiveness of poverty reduction to growth, promoting inclusion, and extending gains to a broader range of human development outcomes related to health, nutrition, education and gender,” the World Bank said.

Neighboring Pakistan, the world’s 38th largest economy, is also seen picking up speed, from 4.7 percent gross domestic product (GDP) growth last year to 5.7 percent in 2016, helped by such projects as the China-Pakistan Economic Corridor and other infrastructure investments.

Bangladesh, ranked 44th, is expected to see GDP growth of 7.1 percent this year and 6.8 percent in 2017, while Sri Lanka, ranked 64th, should see GDP expand by 4.8 percent this year and 5 percent in 2017, helped by improved private consumption and investment.

Overall, the World Bank said the region’s biggest challenges were domestic, including policy uncertainty as well as fiscal and financial vulnerabilities.

“Political economy risks are widespread across South Asia, and uncertainty will need to be managed, particularly with a view to creating an attractive environment for domestic and foreign investment alike,” said Martin Rama, the World Bank’s South Asia Region’s chief economist.

“Delivering the necessary energy, infrastructure, and regulatory improvements remains critically important to increasing private investment, thus boosting job creation and reducing poverty.”

On Tuesday, the Reserve Bank of India (RBI) defied market expectations by cutting its policy rate by 0.25 percentage point to 6.25 percent, a move supported by all six members of its monetary policy committee.

“Global growth has been slowing more than anticipated through 2016 so far, with weak investment and trade damping aggregate demand. Meanwhile, risks in the form of Brexit, banking stress in Europe, rebalancing of debt-fueled growth in China, rising protectionism and diminishing confidence in monetary policy have slanted the outlook to the downside,” the RBI said in a statement.

“World trade volume has contracted sharper than expected in the first half of 2016, and the outlook has worsened with the recent falling off of imports by advanced economies (AEs) from emerging market economies (EMEs). Inflation remains subdued in AEs and has started to edge down in EMEs,” it added.

According to ANZ Research, the rate cut was a pre-emptive move in anticipation of diminished prospects for global growth, including a downward shift in food inflation, lower global growth prospects, uncertainty around the U.S. presidential poll and expectations of a rate increase by the U.S. Federal Reserve in December.

“In our view, the RBI easing cycle is nearing an end now and we expect a prolonged pause through 2017 in the wake of the central bank’s long-term inflation target of 4 percent. The recently concluded OPEC meeting in which members agreed to limit crude output will also weigh on the RBI’s stance. The failure of investment to pick up could, however, open up a window for another 25 basis points cut in December 2016. But that is not our base case,” the Australian bank’s economists said.

Emerging Asia ‘Resilient’

The International Monetary Fund (IMF) said Tuesday in its “World Economic Outlook” report that growth in emerging Asia, “especially India,” remained resilient, with India expected to expand 7.6 percent this year and next, “the fastest pace among the world’s major economies.”

“Large terms-of-trade gains, positive policy actions, structural reforms – including the introduction of an important tax reform and formalization of the inflation-targeting framework – and improved confidence are expected to support consumer demand and investment,” the IMF said.

However, the Washington-based institution said private investment would be constrained in the near term by “weakened corporate and public bank balance sheets.” It also urged New Delhi to “continue reform of its tax system and eliminate subsidies to provide more resources for investments in infrastructure, education and health care.”

The IMF said growth in emerging market and developing economies would accelerate this year for the first time in six years, growing by 4.2 percent in 2016 and 4.6 percent in 2017, although prospects differed across countries and regions.

China is seen expanding by 6.6 percent this year and 6.2 percent next year, down from last year’s 6.9 percent GDP gain, as the world’s second-largest economy continues its shift away from investment-driven to consumption-led growth.

Nevertheless, the IMF warned Beijing to rein in credit that is “increasing at a dangerous pace,” while cutting off support to unviable state-owned enterprises, “accepting the associated slower GDP growth.”

“External financial conditions and the outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy,’’ the IMF said.

Elsewhere in Asia, the ASEAN-5 of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam are expected to see GDP growth expand from 4.8 percent this year to 5.1 percent in 2017, with improved performance in 2016 in Indonesia, the Philippines and Thailand compared to their counterparts.

However, Japan’s outlook is projected to remain “in line with potential” at just 0.5 percent GDP growth in 2016 and 0.6 percent next year.

“Postponement of the consumption hike, the recently announced growth-enhancing measures, including the supplementary budget, and additional monetary easing will support private consumption in the near term, offsetting some of the drag from the increase in uncertainty, the recent appreciation of the yen, and weak global growth,” the IMF said.

“Japan’s medium-term prospects remain weak, primarily reflecting a shrinking population,” it added.

Overall, the IMF projected “subpar” global growth of just 3.1 percent in 2016, with only a slight rise to 3.4 percent next year, following a slowdown in the United States and the impact of Brexit.

“Taken as a whole, the world economy has moved sideways,” said IMF chief economist and economic counselor, Maurice Obstfeld. “We have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world.”

The IMF urged advanced economies to continue their “easy money” policies, along with boosting labor force participation and reducing barriers to market entry among other productivity-lifting structural reforms. It said only “comprehensive, consistent, and coordinated” policies would reinvigorate global growth, ensure it is distributed more evenly, and make it durable.

The OECD is even more bearish than the IMF, forecasting on September 21 that the global economy would expand by 2.9 percent this year and 3.2 percent in 2017, “well below long-run averages of around 3.75 percent.”

The Paris-based economic group said “a low-growth trap has taken root, as poor growth expectations further depress trade, investment, productivity and wages.”

“Monetary policy is becoming over-burdened. Countries must implement fiscal and structural policy actions to reduce the over-reliance on central banks and ensure opportunity and prosperity for future generations,” OECD chief economist Catherine L. Mann said.

However, the OECD agreed with its economic counterparts in forecasting India’s continued growth momentum, predicting an expansion of 7.4 percent this year and 7.5 percent in 2017, compared to China’s 6.5 percent and 6.2 percent, respectively.

While India is now leading the pack in Asia, it still has a lot of ground to make up on the leaders. China’s nominal GDP of $11.3 trillion and Japan’s $4.4 trillion compare to India’s $2.28 trillion, according to IMF data.

Yet the emerging South Asian giant does not have to look too far to see examples of rapid economic development, should it choose to continue its upward climb.