To build on the strong performance to date and allow for growth to take off in earnest, the countries in the region will need to step up their policy and reform agenda. South Asian economies can further open up to trade and foreign direct investment (FDI), improve governance, and foster financial development to enable more efficient allocation of resources to the private sector and reduce the still significant state footprint in the economy. For India, there is a particularly large need for infrastructure investment, including in the areas of (renewable) energy, transport, water, and urban services — land reforms are important to facilitate this investment. The region will also need to prepare its workforce for the challenges of the twenty-first century to be able to fully reap the benefits of its demographic dividend. Investing in human capital and addressing the large informal sector — taking significant steps to strengthen women’s economic empowerment and labor force participation and support the youth—would bring sizable economic gains to the region.
Following up on its investment in tertiary education, India should now also increase spending directed at primary education, broadening access to quality education and boosting literacy across the country, including for young girls.
Sustained structural reform efforts, including successfully harnessing its young and large workforce alongside substantial trade and FDI liberalisation, could bring India’s real GDP per capita to nearly 50 per cent that of the United States by 2040, with important spillovers to the region. Under a full liberalisation scenario, South Asia could contribute about a third of global growth by 2040, with real GDP growth surpassing 6.5 per cent, compared to nearly 6 per cent under the current baseline and 5 per cent in a downside scenario where the benefits of the demographic dividend cannot be secured.
The region’s robust economic performance and recent elections in most South Asian economies offer a propitious window of opportunity to accelerate this reform agenda. Cross-country evidence finds a higher likelihood of achieving more reforms, at lower cost, in the first two years of a government office. A frontloaded reform programme is also more likely to succeed as it provides more time to see the reforms bear fruit. All of this strengthens the motivation for the Indian government to act on reforms early in its second term.
Clear communication on the benefits of the reforms and prioritisation based on their expected macrostructural impact are key to building reform momentum. Stronger social safety nets are especially important to supporting the most difficult structural reforms, notably to labour markets, minimising their distributional impact on the most vulnerable segments of the population, and promoting strong and inclusive growth. To ensure the region’s growth path remains as strong as sustainable, new policies and initiatives need to remain mindful of fiscal, financial and environmental risks.
The author is deputy director, Asia Pacific Department, IMF
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