amid financial sector issues in India, monetary tightening in Pakistan, and global headwinds to regional exports. Growth is expected to recover gradually, assuming a modest rebound in domestic demand driven by monetary stimulus and improved business confidence.
1. Subdued regional growth in 2019
, down sharply from the 7.1 percent pace registered in 2018, and especially in the region’s two largest economies, India and Pakistan.
Weak confidence, liquidity issues in the financial sector in India, and monetary tightening in Pakistan caused a sharp slowdown in fixed investment and a considerable softening in private consumption. Export and import growth for the region moderated, in line with a continued slowdown in global trade and industrial activity.
2. Recent data point to continued slowing
Subdued industrial production growth, a weak manufacturing Purchasing Managers’ Index, and a sharp downturn in exports indicate continuing slowdown in regional economic activity in recent months.
3. Rising domestic demand should drive growth pickup
Private consumption and investment weakened sharply amid challenges in the financial sector and policy tightening.
This projection assumes a modest rebound in domestic demand driven by monetary stimulus and improved business confidence. The weak global trade outlook will continue to weigh on regional export growth in the near term.
4. India’s non-bank financial sector remains a concern
The non-bank financial system in India remains vulnerable to stress. A major idiosyncratic default could trigger an even broader liquidity shortage in the sector than was experienced over the past year. Non-banks represent a significant share of total loans, and their linkages with the banking sector imply that contagion risks are material.
5. Productivity has the potential to accelerate
In contrast to other emerging market and developing economy regions, labor productivity growth in South Asia has slowed only mildly since the global financial crisis.
However, productivity could accelerate even more quickly in the region. Low human capital, poor business environments, inefficient resource allocation, and weak exposure to foreign firms and foreign investment weigh on productivity. Opening up SAR economies by enhancing foreign direct investment inflows and participation in global and regional value chains could support technology and information transfer to the region. Promoting access to finance and improving infrastructure could unlock growth bottlenecks for firms and lift productivity in the region.