South Asia Faces Slower Growth Amid Global Uncertainty, Urged to Boost Tax Revenues

According to the report, the region’s economies are facing compounded pressure from persistent global instability—ranging from geopolitical tensions to financial market volatility.

South Asia’s economic outlook has dimmed as the region grapples with an increasingly volatile global economy. The World Bank, in its newly released South Asia Development Update: Taxing Times, projects regional growth to slow to 5.8 percent in 2025, a notable downgrade of 0.4 percentage points from previous estimates. The forecast signals concern over domestic fiscal fragility and global economic headwinds, with a slight recovery expected at 6.1 percent in 2026.

The report underscores the urgent need for South Asian nations to strengthen economic resilience through targeted reforms, particularly in the area of domestic revenue mobilization.

Global and Domestic Headwinds: Pressures on Fragile Economies

According to the report, the region’s economies are facing compounded pressure from persistent global instability—ranging from geopolitical tensions to financial market volatility. At the same time, many South Asian countries remain constrained by limited fiscal space, a legacy of multiple recent shocks including the COVID-19 pandemic, climate-induced disasters, and surging inflation.

Martin Raiser, World Bank Vice President for South Asia, warned that the region “needs targeted reforms to strengthen economic resilience and unlock faster growth and job creation.” He called for South Asia to open up to trade, modernize its agricultural sectors, and stimulate private sector dynamism to counterbalance external vulnerabilities.

Tax Mobilization: A Central Pillar for Fiscal Strength

A key theme of the report is South Asia's underperformance in tax collection, despite relatively high tax rates. On average between 2019–2023, government revenues in South Asia accounted for only 18 percent of GDP, significantly below the 24 percent average for other developing economies.

The gap is particularly stark in consumption taxes, but corporate and personal income tax collections also fall short. The report estimates that tax revenues in South Asia are between 1 to 7 percentage points of GDP below potential, with informality and large agricultural sectors only partially explaining the gap.

Franziska Ohnsorge, World Bank Chief Economist for South Asia, noted: “Low revenues are at the root of South Asia’s fiscal fragility and could threaten macroeconomic stability, especially in times of elevated uncertainty.”

Policy Recommendations: Bridging the Revenue Gap

To address these gaps, the World Bank proposes a range of policy reforms:

• Eliminating tax loopholes and reducing exemptions.

• Simplifying and unifying tax codes to disincentivize informality.

• Improving tax administration and tightening enforcement mechanisms.

• Leveraging digital technology to expand the tax base and facilitate compliance.

• Introducing pollution pricing as a dual-purpose measure to raise revenue and tackle environmental degradation.

Such reforms could significantly increase fiscal capacity, allowing governments to invest in infrastructure, education, and health while building buffers against external shocks.

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Country-Level Outlooks: Diverging Paths Across the Region

The update provides detailed economic forecasts for individual South Asian nations:

• Afghanistan: Growth estimated at 2.5% in FY24/25, slowing to 2.2% in FY25/26, below population growth rates due to reduced aid inflows.

• Bangladesh: Faces a sharp decline in growth to 3.3% in FY24/25 amid political unrest and financial sector weaknesses. A modest recovery to 4.9% is projected in FY25/26.

• Bhutan: Growth revised to 6.6% in FY24/25, dampened by weak agricultural output, but forecast to rise to 7.6% in FY25/26 due to hydropower development.

• India: Growth expected to taper slightly from 6.5% in FY24/25 to 6.3% in FY25/26, as global factors and domestic policy uncertainty temper gains from private investment.

• Maldives: Projected to grow 5.7% in 2025, supported by infrastructure investments such as the new airport terminal, though external debt risks remain.

• Nepal: Economic damage from floods and a weak financial system have downgraded growth projections to 4.5% in FY24/25 and 5.2% in FY25/26.

• Pakistan: Still recovering from natural disasters and economic shocks, with growth forecast at 2.7% in FY24/25 and 3.1% in FY25/26.

• Sri Lanka: Signs of stabilization emerge with continued debt restructuring progress. Growth is expected to rebound to 3.5% in 2025, before moderating to 3.1% in 2026.

A Critical Juncture for Fiscal Reform

The report makes clear that South Asia stands at a critical inflection point. Without stronger revenue mobilization and structural reforms, the region may struggle to maintain macroeconomic stability and finance essential public services. In a world facing heightened risks—from climate change to geopolitical shifts—building resilient and inclusive economies has never been more urgent for South Asia.