South Asia Development Update April 2025

Growth prospects are dimming across South Asia. Tariffs, policy uncertainty, and financial market volatility have increased substantially. After an unexpectedly weak outturn of 6.0 percent in 2024, growth in South Asia is expected to soften further to 5.8 percent in 2025—0.4 percentage point below October forecasts—before ticking up to 6.1 percent in 2026. The region’s economies face heightened downside risks, including from a highly uncertain global landscape. After a decade of shocks, South Asian economies have limited capacity to cushion new ones. In particular, South Asia’s high debt remains a source of vulnerability to rising borrowing costs or declining funding inflows from private or official sources. The more challenging global environment, combined with domestic fragilities, could be navigated more easily if the region tackled areas of particularly large inefficiency or vulnerability. Domestic revenue mobilization could lessen South Asia’s vulnerability to fiscal and external pressures. The region’s unproductive agriculture sectors could benefit from more efficient pricing of inputs, as well as broader access to modern technologies and practices.

Dimming growth prospects across South Asia amplify the challenge of creating jobs. Many in South Asia’s rapidly growing workforce are likely to continue to seek opportunities abroad. Migrants from South Asian countries—mainly to countries outside the region—account for about 3 percent of South Asia’s working-age population. About one-half of them work in Gulf Cooperation Council countries, are typically low-skilled, and on short-term contracts. Another one-quarter work in advanced economies and tend to be highly skilled and longer-term migrants. While the challenges of emigration have been well documented, South Asian countries’ large diasporas also bring economic benefits to the home countries, both while workers are abroad and after they return home—through remittances, improved skills, investments, and trade ties.

While South Asia has better growth prospects than other emerging market and developing economy (EMDE) regions, it is also one of the regions that is most vulnerable to rising global temperatures and most affected by extreme weather events. Because of South Asia’s already-high average temperature and reliance on rain-fed agriculture, rising global temperatures could lead to output and per capita income losses by 2050 that are larger than those in the average EMDE. Higher temperatures would cause significant damage in the most vulnerable sectors, such as agriculture, but more limited damage in the most resilient sectors, such as services. About one-third of the total climate damage could be reduced if the private sector could flexibly shift resources across activities and locations in response to these climate-induced changes in relative prices and incomes. Even South Asia’s fiscally constrained governments have scope to facilitate these shifts, including by expanding access to finance, improving transport and digital connectivity, and providing well-targeted and flexible social benefit systems.

South Asian governments need to raise revenues to shore up their fiscal positions. Although tax rates in South Asia are often above the emerging market and developing economy (EMDE) average, most tax revenues are lower. On average during 2019–23, South Asian government revenues totaled 18 percent of GDP—well below the 24 percent of GDP average in EMDEs. Controlling for tax rates and the size of potential tax bases, tax revenues in the region are 1–7 percentage points of GDP below potential, with shortfalls in five of the region’s eight countries larger than in the average EMDE. Revenue shortfalls are particularly pronounced for consumption taxes but are also sizable for personal income taxes and, in the larger economies, corporate income taxes. Weak revenue collection has only partly reflected country characteristics, such as widespread informal activity outside the tax net and large agriculture sectors. Even after accounting for these characteristics of South Asian economies, sizable tax gaps remain—highlighting the need for improved tax policy and administration. There is scope to raise tax revenues by eliminating loopholes, streamlining tax codes, strengthening enforcement, and facilitating compliance. The introduction of pollution pricing could also both boost revenues and help address the region’s high pollution.

The global economy is entering uncharted territory, presenting heightened challenges for South Asia. Trade is becoming less open, policy uncertainty is soaring, and downside risks are rising. Although South Asia continues to grow faster than any other region in the world, its prospects are dimming.