The Indian economy is expected to expand by 7.6 and 7.4 per cent in 2019 and 2020, respectively, after expanding by 7.4 per cent in 2018. Economic growth continues to be underpinned by robust private consumption, a more expansionary fiscal stance and benefits from previous reforms. Yet, a more robust and sustained recovery of private investment remains a crucial challenge to uplifting medium-term growth.
Growth is projected to remain below its potential in the near term in South Asia. However, some economies in South Asia are also experiencing significant difficulties, says the latest report by the United Nations on global economic situation and prospects.
Strengthening labour market indicators is a crucial aspect to forge a more inclusive development trajectory in South Asia. However, employment growth has recently slowed down in the region, and female labour force participation remains low and declining. In addition, youth unemployment is a major concern in several economies, especially given the growth of working-age populations.
In India, for example, job creation rates in the formal sector have been feeble, leaving many workers underemployed or in low-salary jobs, with the situation for youth particularly worrisome. In fact, well-educated youths are struggling to find jobs in the formal sector, and most of them are absorbed into low-paying and vulnerable jobs in the informal sector.
Monetary policy stances have gradually and moderately tightened in several economies. In India, the central bank raised its policy interest rate by 25 basis points in both June and August, to reach 6.5 per cent, while the domestic currency depreciated to record lows in early October. Despite the depreciation, consumer price inflation moderated in the second half of 2018 and it is projected to remain within the central bank’s target range. Given the currency peg of the Nepali rupee to the Indian rupee, Nepal Rastra Bank is expected to follow the same tightening path in the near term.
The fiscal policies across the region have gradually moved to a more expansionary stance; thus fiscal deficits are projected to remain elevated. To avert sustainability concerns, medium-term consolidation plans are required in some economies, particularly those with a fragile tax base and elevated levels of debt.
For example, in India the size and composition of public budgets have been important in promoting growth, prioritizing public investments in infrastructure, subsidies and welfare payments, and the rural economy. This will prevent any reduction of the fiscal deficit in the near term.
Beyond the short-term outlook, South Asia—which accounts for 25 per cent of the world population but only for 5 per cent of the world GDP—also needs to tackle medium-term challenges and structural constraints to unleash its enormous growth potential. Amid limited trade openness and regional integration, South Asia has an enormous potential to gain market share in foreign markets and to participate more decisively in global value chains (GVCs). In fact, while there are positive examples, such as the software and business outsourcing sectors in India, the positive effects of increased global integration have remained limited in most economies in the region.
According to the UN report ‘World Economic Situation and Prospects’, South Asia needs to tackle this issue through a comprehensive policy approach. Public policies can also take a more proactive stance to promote innovation activities—for example, by uplifting public R&D interventions that can catalyse private R&D investments and by enhancing complementary factors, including infrastructure, labour skills and finance.