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Sustaining economic growth in South Asia and Sri Lanka
View(s):The latest World Bank report on South Asia expects the economies of the South Asian region to pick up in 2013. It expects the South Asian regional GDP growth to rise to 5.7 per cent in 2013 and improve to 6.7 per cent in 2015.
This expectation is based on gradual improvement in global demand for South Asia’s exports, policy reforms in India, stronger investment activity and a return to normal agricultural production. Impliedly, it stresses the need for fiscal consolidation and price stability in several South Asian countries. There are other non-economic preconditions that are also essential for sustained economic growth and development.
The World Bank report notes that economic growth of the South Asian region weakened considerably in 2012 to an estimated 5.4 per cent from 7.4 per cent in 2011. The reasons for this decline were electricity shortages, monsoon rains, fiscal deficits, high inflation and security uncertainties.
Sri Lanka
Several of these factors that slowed economic growth in the region adversely affected Sri Lanka’s economic growth. However, electricity supplies were maintained virtually uninterrupted, despite a severe drought and disruption of oil imports. The drought affected hydropower generation while procuring of crude oil was difficult due to the US embargo on Iranian trade. Therefore, the availability of continuous electricity was a commendable achievement in Sri Lanka, even though the high expenditure affected the balance of payments adversely. The hydropower generation is expected to increase much in 2013 to benefit both the trade balance and public expenditure.
Fiscal deficits
South Asian regional growth is determined very much by the growth of India’s economy. The global slowdown had much to do with India’s high growth rates declining, as was the case with the other South Asian countries. However, as the World Bank states there were other fundamental macroeconomic weaknesses that contributed to the decline. These weaknesses would impair long term growth if they are not addressed.
Among the fundamental weaknesses are large fiscal deficits in several countries. The World Bank stressed that large fiscal deficits in South Asia, compared with the other developing regions, remain a source of concern, as government borrowing requirements may be crowding out private investment. Furthermore, the associated spending from such borrowing may be contributing to inflationary pressures. The World Bank report states that “Despite efforts at consolidation, fiscal deficits are 6 per cent or higher in Pakistan and Sri Lanka and above 4 per cent in Bangladesh.”
The need to contain the fiscal deficit has been recognised by the Sri Lankan Government and the Central Bank of Sri Lanka. It was brought down from 8 per cent of GDP to 6.9 per cent of GDP in 2011. It is likely that the fiscal deficit target of 6.2 per cent of GDP for 2012 would be exceeded to some extent given the fiscal performance in the first ten months. Even the containment of the deficit to about 6.5 per cent in 2012 would be an achievement given the decline in economic growth last year.
What is important is that even if the fiscal deficit target of 6.2 per cent for 2012 is not achieved, the effort to achieve the deficit target of 5.8 per cent of GDP for 2013 should be pursued with a strong political will. This would require economic reforms that curtail government expenditure on unproductive enterprises, drastic reduction of losses of public enterprises by changes in pricing policy and improvements in efficiency and an improvement in revenue collection.
Price stability
Price stability is vital to ensure a high growth momentum. However, the World Bank points out that the annual (year-on-year) inflation picked up again in December in several South Asian counties, including Pakistan and Bangladesh, caused partly by an acceleration in the pace of food and fuel price increases. The Indian Government’s recent decision to allow state-run fuel retailers to raise prices of heavily subsidised diesel would add inflationary pressures. This decision has been taken as fuel subsidies are a major drain on India’s budget, as in Sri Lanka.
India is running a high deficit that the Government is hoping to bring down to within 5.3 per cent of GDP by the end of financial year at the end of March. It is a measure designed to revive the Indian economy that is currently growing at its slowest pace in a decade. The decision to increase fuel prices now has been dictated by political expediency of not taking an unpopular policy decision nearer the election next year.
The World Bank report noted: “In Sri Lanka, a depreciation of the currency, drought and earlier increases in administered fuel prices caused inflation to surge to 10 per cent by July; inflation remained close to that level moderating slightly to 9.1 per cent in December”. Containment of inflation at single digit levels is a challenging task this year with December inflation exceeding 9 percent.
Broader perspective
In the second half of the 20th Century South Asia’s economic growth lagged far behind that of South East Asia and North East Asia. The lesser performance of South Asian economies is attributed to inward looking policies, statist policies, poor economic management and political drawbacks. An eminent economist described India’s slow growth of the past as “the Hindu rate of growth”, implying that there were inherent weaknesses in India that did not enable it to move faster. India was also characterised as ‘the sleeping Elephant” in contrast to the “Asian Tigers”.
This changed when India and other South Asian economies adopted outward looking economic policies. Sri Lanka was the earliest to undertake structural reforms in 1977. India’s later move in the 1990s under Rajiv Gandhi’s initiative and Manmohan Sigh’s leadership changed India’s growth momentum. India undertook significant economic reforms and opened her economy. The economic growth increased rapidly to reach 10 per cent. This uplifted the growth momentum of the region and South Asia was viewed as the new and emerging growth centre together with China. However, the global slowdown and the lack of a new wave of economic reforms have retarded growth in the region and in India in particular. One of the glaring weaknesses of India’s economic growth was the continued persistence of a high level of poverty.
The World Bank analysis is confined to economic policy measures. In fact, the factors holding back economic growth in South Asia are broader issues of political economy. State control of many economic activities requires to be relinquished. Loss-making state enterprises should be reformed or privatised. More incentive structures for investment are needed. In brief, second and third waves of reforms are needed in Asian countries to release their growth potential.
There is serious political opposition and ideological resistance to undertake pragmatic economic policies. Nepal, for instance, is unable to exploit its vast hydropower generation potential due to political protest. Ethnic and religious conflicts continue to distract the state from economic policy changes. Lack of law and order and the rule of law deter foreign investment.
Economic growth in South Asia can be sustained only with reform of these political economy factors that have a direct bearing on economic policies and performance. This is especially pertinent for Sri Lanka.
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