The economic storm brewing in South Asia

As it takes stock of the anticipated effects of the coronavirus pandemic, the World Bank has published an economic outlook with strikingly gloomy predictions for South Asia.
The bank’s analysts warn that the region might record its worst economic performance in 40 years, and at least half of it could experience a “serious recession.” Regional growth is expected to plummet to between 1.8 and 2.8 percent in 2020, a major drop from the 6.3 percent forecast six months ago.
In the Maldives, GDP might decline by up to 13 percent. Afghanistan, Pakistan and Sri Lanka could find GDP growth “in negative territory.” In the worst-case scenario, the entire region might experience contraction of GDP.
The bank bases this assessment on the confluence of many problematic factors: A decline in tourism, disruption of supply chains, reduced demand for garments, the withdrawal of international capital, and decreases in remittance inflows.
Keep in mind that these gloomy forecasts are for a region that was already experiencing economic distress long before the pandemic. India, for example, has suffered through one of its worst slowdowns in years, with problems in all key sectors, including manufacturing and telecommunications. Unemployment is also higher than it has been for quite some time. Pakistan, meanwhile, was enduring a prolonged debt crisis that its government had eased but not eliminated.
Furthermore, South Asia suffers from structural constraints that hobble economic growth even in the best of times. Thanks in no small part to poor infrastructure, including substandard roads and poorly functioning electricity grids, the region is badly integrated and lacks connectivity.
Unsurprisingly, intraregional trade volume is far below that of most other regions. Additionally, South Asia’s main mechanism for regional cooperation, the South Asian Association for Regional Cooperation (SAARC), is ineffective — in large part because of the toxic relationship between key members India and Pakistan.
The specter of these shattered economies in South Asia should not be taken lightly. To put it simply, South Asia matters. According to a recent International Monetary Fund study, the region is home to more than one-fifth of the world’s population and, under ordinary circumstances, contributes more than 15 percent of global economic growth. It occupies a central and strategically important geographic location, linking the Middle East to East Asia and sitting astride the Indian Ocean region. It is a major epicenter for Chinese investment and influence, mainly through Beijing’s Belt and Road Initiative.
It is also a highly volatile region; it is vulnerable to threats ranging from terrorism to climate change, it is the scene of a long-running war, and it is home to to two bitter rivals who happen to be nuclear-armed neighbors.
Accordingly, what happens to the economies of South Asia — and, to be sure, the ultimate trajectory of the region’s economic performance for the foreseeable future will be tied to the severity of the pandemic and the nature and quality of government responses — will have repercussions not only for the region, but for the entire world.
India, which is a leading world economy and — thanks in great part to its large, young population and its middle class — an attractive global market, will struggle mightily to kick start its sputtering economy.
Bangladesh, one of the region’s major economic success stories in recent years, will confront the reality of a severely weakened garment industry that has been one of the most dynamic not only in Asia, but the world.
Core growth sectors in many South Asian countries — such as textiles in Pakistan and Bangladesh, and tourism in Sri Lanka and the Maldives — are likely to suffer severe coronavirus-induced shocks, thereby exacerbating the vulnerabilities of nations with no other immediate options to which they might turn to generate growth.

Economic distress will strengthen the forces of hard-line nationalism, which were already strong in the region — and the world — prior to the pandemic.

Michael Kugelman

Economic distress will strengthen the forces of hard-line nationalism, which were already strong in the region — and the world — prior to the pandemic. In India, for example, the government is likely to double down on its Hindu nationalist agenda in an attempt to appease and distract a support base worried about the worsening economic stress. A more aggressive pursuit of this agenda, taking an increasingly hard-line position on Pakistan, would suggest India-Pakistan tensions are unlikely to ease.
On the whole, the region — again, like the wider world — will increasingly look inward, focusing on economic recovery. At least initially, it will accord less policy space to foreign policy.
If there is one possible development with encouraging implications for regional economic recovery, it is the potential for a resuscitation of SAARC. Several weeks ago, Indian Prime Minister Narendra Modi convened a video conference during which association members discussed regional responses to the coronavirus crisis. This resulted in the creation of an emergency fund and commitments to share supplies.
Greater regional cooperation such as this strengthens the prospects for regional growth. However, enduring tensions between India and Pakistan will preclude any lasting forward movement on this front.
We hear so much about the deleterious economic effects of the pandemic on the US, China, Europe and the Middle East; it is important that we include South Asia in this sobering conversation as well.

• Michael Kugelman is deputy director of the Asia Program and senior associate for South Asia at the Woodrow Wilson International Center for Scholars. Twitter: @michaelkugelman