South Asia has long been seen as an economic laggard, but that could start changing. At a time when growth is falling sharply in most other emerging nations, as commodity prices collapse and global trade slows, South Asia has proved relatively resilient. Together, India, Bangladesh, Sri Lanka and Pakistan are now growing at an average annual pace of close to 6%, compared to 2% for the emerging world outside China.
Due to their lower per capita income, it should hardly be surprising that South Asian economies are growing faster than other emerging markets. But that spread of nearly four percentage points is the largest in the region’s post-independence history. While hopes for a revival in India exploded when Prime Minister Narendra Modi took power in 2014, promising major economic reform, its smaller neighbours remained under the radar. Now, however, Bangladesh, Sri Lanka and Pakistan are leading the quiet rise of South Asia.
Since the global financial crisis, a number of emerging markets have been ramping up debt and government spending. But the smaller South Asian economies have largely avoided these excesses, so they still have room to boost growth. While falling prices for oil and other raw materials are hurting most emerging regions, they are a boon to the nations of South Asia, all of which are commodity importers.
The impact of low commodity prices is helping to keep inflation low even as growth accelerates, while countries like Brazil, Russia and South Africa face stagflation. Many emerging economies have been hurt by rising wages and have seen their share of global exports decline, but not Pakistan and Bangladesh. Their wages are still competitive, and they are increasing their share of global exports, even as growth in global trade is stagnating for the first time since the 1980s.
They are benefitting along with Sri Lanka as manufacturers look for cheaper wages outside of China, with wages in the manufacturing sector having increased by 370% in the world’s second largest economy over the past decade. Bangladesh is now the second leading exporter, after China, of ready-made clothes to the US and Germany.
And as China and Japan compete with India for influence in the Indian Ocean, they are pouring billions into new ports in Bangladesh, Pakistan and Sri Lanka. The upshot of these positive trends is that South Asia could sustain a growth rate of over 5% for the next few years, which would make it one of the fastest-growing regions in the emerging world.
The competition between Japan and China is a huge boost: after Beijing recently announced plans to build a $46 billion “economic corridor” connecting Pakistan to China, Japan beat out China for rights to build Bangladesh’s first deep-water port, at Matarbari. The inflow of foreign direct investment is helping to keep South Asia in what can be identified as the investment sweet spot: strong economies tend to invest between 25 and 35% of GDP. Sri Lanka and Bangladesh are now right in the sweet spot, at or near 30% of GDP.
Investment also tends to have the greatest impact on jobs and growth when it is going into manufacturing. Both Sri Lanka and Bangladesh have strong manufacturing sectors, representing 18% of GDP. Pakistan is much weaker, with investment at 14% and manufacturing at 12% of GDP. But Pakistan’s manufacturing sector is now growing, due to both increasing electric output and the fact that – like Bangladesh – its young population and labour force is expected to continue expanding for at least the next five years.
At a time when much of the workforce is entering retirement age in larger emerging nations including China, Korea, Taiwan and Russia, the positive demographic trends in South Asia are potentially a big competitive advantage. With exports and investment strong, Bangladesh is running a current account surplus, Sri Lanka is reducing a deficit now equal to 3% of GDP, and Pakistan has cut its current account deficit from 8% of GDP in 2008 to just 1%.
Just as important, these South Asian nations have managed to keep growth alive without sinking deep into debt. All three don’t have credit troubles, with relatively modest growth in private credit as a share of GDP over the last five years, and loan to deposit ratios of less than 80% – well below the 100% level which signals that banks are overextended.
This marks South Asia as an island of opportunity in a world where many big emerging countries, led by China but including Turkey, Thailand and Brazil, have seen dangerously sharp expansion of credit in the last five years. India, where around 15% of the loans in the banking system are non-performing, faces similar credit risks.
Governments in South Asia have been working to reduce state meddling in the economy, paring back public debts and deficits. The governments of Bangladesh and Sri Lanka are still running deficits of at least 5% of GDP, but they are coming down. Despite being hobbled by allegations of corruption, the government of Nawaz Sharif has pushed a reform agenda including privatisation since his election in May 2013.
The government deficit has fallen to less than 5% from 8.5% in 2012, and growth has accelerated to more than 5% from 3% before Sharif took office. The consumer is out in force, with television channels reporting record-breaking sales in the run up to Eid and one million square feet of retail space under construction in Lahore alone. Though Pakistan is a Sunni-dominated country it has long had pragmatic relations with the Shiite government in Iran, and could be a beneficiary of the nuclear deal lifting international sanctions on Tehran.
The biggest risk to South Asia is the one that has dogged all its members since independence in the 1940s: political instability and regional hostilities. In essence, the Sharif government in Pakistan and the Awami League government in Bangladesh are trying to revive civilian control in nations long dominated by the military – a campaign that could trigger a backlash in these coup-prone countries. The uncertainty is so high, many Pakistani officials prefer to keep offices in Dubai, and Bangladesh’s ruling party is working to permanently sideline all opposition.
In Sri Lanka, President Mahinda Rajapaksa recently called early elections in a bid to hang on to power for a third term, but was rejected by voters wary of his increasingly authoritarian ways. Relieved executives at one local company, who were scared to be openly critical of Rajapaksa when he was in power, said his loss had lifted the “Mugabe risk”, at least for now. Rajapaksa is trying to stage a comeback, running for prime minister in the parliamentary elections next month.
The old hostilities in South Asia also continue to weigh on trade among its neighbouring states. Trade among neighbours has been vital to the rise of East Asia and Eastern Europe, but in South Asia intraregional trade represents just 6% of all trade, lows matched only in parts of Latin America and Africa. There are however signs of improvement as the Indian government begins to reach out to neighbours, and relations are improving particularly with Bangladesh and Sri Lanka.
The final risk is that, after decades of regional stagnation and tension, so many people have migrated abroad that their remittances now account for 7% of GDP or more in the three smaller South Asian states. Without those remittances, the current account balances would be in much worse shape. In Pakistan and Bangladesh most of that income is sent home by expats working in the Gulf region, and is thus subject to the vagaries of both oil prices and Middle East politics.
The long history of conflict and trade fragmentation in South Asia makes it a very hard region to hype. However, India is growing at 5 to 6% – less than government claims but still well above the current emerging market average – and its small neighbours are picking up momentum. They are all posting relatively strong growth, with their stock markets up between 30 to 50% over the last three years, and doing it without attracting much attention as a group. Since hype normally signals the end of a good run, it is a big plus that no one is talking up the “South Asian Tigers”, at least not yet.
Ruchir Sharma is a Times of India columnist.