World Bank Cuts South Asia Growth Forecast

Amid rising global economic uncertainty, South Asia’s growth prospects are dimming, with the World Bank downgrading projections for most countries in the region. Strengthening domestic revenue mobilisation is critical for reinforcing fragile fiscal foundations and building resilience against future shocks, according to the World Bank’s latest South Asia Development Update, released Wednesday.

Titled “Taxing Times”, the report forecasts the region’s growth to slow to 5.8 percent in 2025, down 0.4 percentage points from October estimates, before edging up to 6.1 percent in 2026. However, the outlook remains vulnerable to a range of risks—including global economic headwinds, constrained fiscal space, and structural domestic challenges.

“Multiple shocks over the past decade have left South Asian countries with limited buffers to withstand an increasingly challenging global environment,” said Martin Raiser, World Bank Vice President for South Asia. “The region needs targeted reforms to address persistent vulnerabilities—ranging from fragile fiscal positions and underperforming agricultural sectors to the growing risks of climate-related disruptions.”

While tax rates in South Asia often exceed the developing world average, actual revenue collection lags significantly behind. Between 2019 and 2023, government revenues averaged just 18 percent of GDP in South Asia, well below the 24 percent average for other developing economies.

The report identifies substantial tax gaps—between 1 and 7 percentage points of GDP—relative to potential revenues. This shortfall is partly attributed to widespread informality and the dominance of agriculture in regional economies. Yet even after accounting for these factors, the gaps remain large, signalling deep inefficiencies in tax policy and administration.

“Low revenue mobilisation is a root cause of South Asia’s fiscal fragility,” said Franziska Ohnsorge, Chief Economist for South Asia at the World Bank. “High tax rates coupled with poor enforcement result in a narrow tax base, placing an excessive burden on compliant taxpayers while depriving governments of resources to fund essential public services.”

To close the gap, the World Bank urges a comprehensive reform agenda, including eliminating tax exemptions, streamlining and unifying tax codes, tightening enforcement, and leveraging digital technologies to expand the tax base and improve compliance. It also highlights the potential of pollution pricing—such as carbon taxes—as a dual solution to raise revenue and combat environmental degradation.

In the face of global volatility, boosting domestic revenue capacity could be key to South Asia’s long-term stability and sustainable growth.