How can South Asia build resilience in these taxing times?

The global economy is entering uncharted territory, presenting heightened challenges for South Asia. Trade is becoming less open, policy uncertainty is soaring, and downside risks are rising. 

Although South Asia continues to grow faster than any other region in the world, its prospects are dimming. Forecasts have been downgraded in almost all South Asian countries, and growth could be further set back by bouts of financial market turbulence, increasing trade restrictions, declining capital inflows, and reform setbacks.

With an external environment presenting mounting risks, how can South Asia prepare for potentially taxing times ahead?

Our latest South Asia Development Update, Taxing Times, recommends that the region start by tackling some of its greatest vulnerabilities: fragile fiscal positions, susceptibility to climate damage, and a growing labor force with insufficient jobs. Because policy distortions and inefficiencies in these three areas are sizable, targeted reforms would not only build resilience but also offer potentially large economic gains. We should also add a fourth priority to this list, which will be the focus of an upcoming blog: Reforming trade and customs to benefit from the realignment of global goods and investment flows.

Here's a closer look at steps countries in the region can take to help ensure they continue on their development journeys.

Building fiscal buffers: For most South Asian countries, increased domestic revenue mobilization is a prerequisite for strengthening fiscal positions and building resilience amid uncertainty. Low revenues have been at the root of South Asia’s fiscal problems that repeatedly threatened macroeconomic stability over the past decade. 

Compared with the average for emerging market and developing economies (EMDE), tax rates in the region are often higher but tax revenues are lower. On average during 2019-2023, South Asia collected government revenues totaling about 18 percent of gross domestic product, well below the 24 percent average for EMDEs. 

The effects of low revenues are reflected in the region’s large public debt and debt service burdens. South Asian countries spent an average of 26 percent of their revenues on interest payments—almost three times the EMDE average of 9 percent. Low revenues also make it difficult to deliver basic government services. Most South Asian countries spend less on health care and education than what would be expected based on their per capita incomes. 

But South Asian countries have ample room to raise revenues by eliminating loopholes, streamlining tax codes, tightening enforcement, and facilitating tax compliance.  

Help the private sector in climate adaptation: South Asia—with its glacier-fed rivers, predominantly rain-fed agriculture, low-lying river deltas and islands, and high average temperatures—is one of the most vulnerable regions to rising global temperatures. Higher temperatures could cause large damage in economically significant sectors, such as agriculture. 

South Asia’s development path will depend on its ability to invest in resilience, but governments in the region are severely constrained by fiscal pressures. As a result, much of the burden of adaptation to rising global temperatures will fall on the private sector, including households, farms, and firms. Total climate damage could be cut by about one-third by 2050, provided the private sector can flexibly shift resources across activities and locations in response to these climate-related changes. 

Even South Asia’s fiscally constrained countries have the scope to facilitate this with policies that allow for clearer market signals and remove obstacles to shifts of workers and capital across sectors, regions, and firms. Such policies could include broader access to finance, better connectivity, and well-targeted and flexible social benefit systems.

Leverage the benefits of migration: South Asia’s rapidly growing labor force is an economic opportunity if enough jobs can be created for them. Most people will need to find jobs in the region. But some will continue to seek opportunities abroad. South Asia’s large diaspora, which amounts to about 3 percent of the region’s working-age population, can be a source of skills, entrepreneurship, investment networks, and trade ties. 

Countries can harness the potential of lower-skilled, temporary migrants abroad by ensuring better working conditions and formal training through bilateral agreements, facilitating remittance flows, and supporting entrepreneurship among returning migrants. To unlock greater benefits from highly skilled, long-term migrants, countries can leverage existing networks through policies that attract foreign direct investment or joint ventures, incentivize return migration, and remove obstacles to trade between host and home countries.

Three decades of robust growth despite the many ups and downs of the global economy show the underlying strength of South Asia’s development trajectory. Indeed, every crisis carries in it the seeds of future opportunities. By bolstering the most fragile parts of their economies, South Asian countries can chart a path through today’s uncertainties, too.

Watch the launch event for this report.