South Asia's growth engine India is expected to slow down a tad to 8.4% this year from an estimated 9.5% in 2011 before rising again to 8.7% in 2012, the World Bank has forecast.
South Asia as a whole is still projected to continue to post robust growth of 7.7% and 8.1% over the forecast horizon in FY2011/12 and FY2012-13, respectively-albeit a deceleration from the 8.7% growth recorded in FY2010/11, it said.
The projected slowdown in South Asia's real GDP growth this year follows its acceleration from 7.0% in FY2009-10, buoyed by very strong growth in India, up 1.8%age points from 7.7% in 2009, the World Bank's Global Economic Prospects 2011 released Thursday noted.
Excluding India, which represents 80% of regional GDP, growth (on a fiscal year basis) firmed, but to a more modest 5.1% from 4.3% the year before.
On a calendar year basis, GDP for the region as a whole is estimated to have expanded 8.4% in 2010 after 5.3% in 2009, and to 4.8% in 2010 from 3.8% in 2009 if India is excluded, the Bank noted.
These strong growth rates mainly reflect robust domestic demand, supported by macroeconomic policy stimulus measures, and a revival in investor and consumer sentiment, the Bank said noting improved external demand and stronger private capital inflows have also played a role.
However, despite some modest progress toward fiscal consolidation in 2010, South Asia has the largest fiscal deficit among developing countries with the region-wide deficit estimated at 8.2% in 2010 with India's fiscal deficit pegged at 9.6% of GDP.
The projected slowdown in growth this year partly reflects expected further tightening of fiscal and monetary policies, which are aimed at reducing inflationary pressures, bringing fiscal deficits down to sustainable levels, creating fiscal space, and avoiding the build-up of large external imbalances, the Bank forecast said.
India is targeting progressive reductions in the central government's fiscal deficit to 3.0% of GDP by end-FY2013-14 from 6.7% in FY2009-10, which will be supported by proceeds from divestment and reforms to fuel-subsidy programmes.
The region's high fiscal deficits reflect a number of longstanding structural factors, with significant pressures emanating from both the revenue and expenditure sides. In particular, tax mobilization in the region is low.
Other factors have contributed to the region's large deficits, including in the case of India, for example, elevated countercyclical spending that has yet to be fully unwound.
Inflationary pressures were up across most economies in the region in 2010, with elevated capacity utilisation rates, accommodative macro-policy stances and increased inflationary liberalization of fuel-price subsidies contributing to higher prices in India.
More recently, inflationary pressures have been partly offset by falling local food prices, due to improved harvests following a good 2010 monsoon, particularly in Afghanistan and India.
Net private capital inflows (excluding official inflows) to South Asia strengthened by an estimated 18.4% in 2010 to $81 billion from 2009, and held fairly steady as a share of GDP at 4.0% in 2010 versus 4.3% in 2009. India and Sri Lanka account for the bulk of private capital inflows.
Compared with other developing regions, where portfolio inflows averaged 0.8% of GDP in 2010, portfolio inflows are relatively high in South Asia-and largely reflect record high foreign portfolio inflows into India during 2010.