South Asia continues to show strong economic growth and an improved macroeconomic outlook on the back of reforms in some of the world’s largest countries. GDP growth is expected to pick up in 2018, reaching an average of 7.1%, confirming the region as one of the world’s fastest-growing. India remains the region’s main driving force, but the acceleration is widespread and encompasses all the countries in the region, with the exception of Nepal where a slowdown is expected after the fast recovery of 2017 when the country rebounded from the aftermath of the 2015 earthquake. On average, the region is burdened by both higher levels of public debt than other emerging economies, and—in some countries—large current account deficits. However, lower commodity prices have contributed to keep inflation low and international accounts more balanced in recent years.
In spite of growing international flows, South Asia remains the region with the lowest trade penetration in the world, with imports and exports of both services and merchandise goods amounting to approximately 39% of regional GDP in 2017. It is not surprising, then, that the country in the region that is most open to foreign competition—Bangladesh—ranks only 125th on this component of the GCI 4.0, while South Asian economies apply an average tariff rate of 15% to imports from the rest of the world. Investment flows and integration into global value chains have also, so far, been rather limited.
While some countries in the region have managed to localize segments of global industries—in terms of both services and manufactured goods—all will need to increase their innovation capacity and technological readiness in order to move towards higher value-added processes and productions. ICT adoption and innovation capability are the two areas where the region lags even further behind the rest of the world, with the region’s median performance at only one-third of the global theoretical frontier. Ranked 31st, India punches significantly above its weight in terms of innovation capability, and is an outlier in the region, with the second-best country, Pakistan, following far behind at 75th. Interestingly, these two countries demonstrate the region’s lowest levels of technological readiness, confirming the challenge for large emerging economies to fully integrate their entire population—especially those living in the most remote areas—into modernization processes.
India leads the region in all other areas of competitiveness except for health, education and skills, where Sri Lanka boasts the highest healthy life expectancy (67.8 years) and the workforce with the highest amount of schooling (9.8 years). These two countries are also the ones that can rely on the most efficient infrastructure system. India has invested more heavily on transport infrastructure and services, while Sri Lanka has the most modern utility infrastructure.
India ranks 58th (62.0) and has demonstrated sizeable improvements over the past year. Compared with the 2017 backcast edition, India is up five places, the largest gain among G20 economies. India is a remarkable example of a country that has been able to accelerate on the pathway to innovation (where it now ranks 31st, with a score of 53.8), due, particularly, to the quality of its research institutions. In spite of a high degree of entrepreneurship (61.1, 23rd), business dynamism is hampered by administrative hurdles. While Indian companies can access the 3rd largest market in the world (which translates into a perfect mark of 100.0 on the Market size pillar), the country would benefit from increased trade openness (136th) to drive productivity growth. More investments will be necessary to spur innovation beyond hubs of excellence and diffuse economic growth more broadly. This includes continuing to widen the adoption of ICT technologies (28.0, 117th) and improving the quality and conditions of human capital across the country, taking advantage of an extremely young population. India currently ranks 108th on the Health pillar and 96th on the Skills pillar of the index.