TBT Desk: Stepping up domestic revenue mobilization could help the South Asia region strengthen fragile fiscal positions and increase resilience against future shocks, said the World Bank (WB) in its twice- yearly regional outlook.
Released on Wednesday, the latest South Asia Development Update, Taxing Times, projects regional growth to slow to 5.8 percent in 2025-- 0.4 percentage points below October projections-- before ticking up to 6.1 percent in 2026.
This outlook is subject to heightened risks, including from a highly uncertain global landscape, combined with domestic vulnerabilities including constrained fiscal space.
It said amid increasing uncertainty in the global economy, South Asia's growth prospects have weakened, with projections downgraded in most countries in the region.
"Multiple shocks over the past decade have left South Asian countries with limited buffers to withstand an increasingly challenging global environment," said Martin Raiser, WB vice president for South Asia.
"The region needs targeted reforms to strengthen economic resilience and unlock faster growth and job creation. Now is the time to open to trade, modernize agricultural sectors, and boost private sector dynamism," he added.
A key component of strengthening economic resilience will be domestic revenue mobilization. Although tax rates in South Asia are often above the average in developing economies, most tax revenues are lower.
On average during 2019-23, government revenues in South Asia totaled 18 percent of GDP-below the 24 percent of GDP average for other developing economies.
Revenue shortfalls are particularly pronounced for consumption taxes but are also sizable for corporate and personal income taxes.
Tax revenues in South Asia are estimated to be 1 to seven percentage points of GDP below their potential, based on existing tax rates.
Some of this shortfall is explained by the widespread informality and large agricultural sectors in the region. However, even after taking this into account, sizable tax gaps remain, highlighting the need for improved tax policy and administration.
"Low revenues are at the root of South Asia's fiscal fragility and could threaten macroeconomic stability, especially in times of elevated cuncertainty," said Franziska Ohnsorge, WB chief economist for South Asia.
"South Asian tax rates are relatively high, but collection is weak, leaving those who pay taxes with high burdens and governments with insufficient funds to improve basic services," she added.
The report recommends a range of policies to improve tax revenues by eliminating loopholes, streamlining tax codes, tightening enforcement, and facilitating tax compliance.
This includes paring back tax exemptions; simplifying and unifying the tax regime to reduce incentives to operate in the informal sector; and using digital technology to identify taxpayers and facilitate collection.
The report notes the potential of adopting pollution pricing, which could help address the high levels of air and water pollution while raising government revenues.
Highlighting the country outlooks, it said in Bangladesh, growth is expected to slow in FY24/25 to 3.3 percent amid political uncertainty and persistent financial challenges, and the growth rebound in FY25/26 has been downgraded to 4.9 percent.
In India, growth is expected to slow from 6.5 percent in FY24/25 to 6.3 percent as in FY25/26 as the benefits to private investment from monetary easing and regulatory streamlining are expected to be offset by global economic weakness and policy uncertainty.
In Pakistan, the economy continues to recover from a combination of natural disasters, external pressures, and inflation, and is expected to grow by 2.7 percent in FY24/25 and 3.1 percent in FY25/26.
The regional outlook said in Bangladesh, real GDP growth moderated to 4.2 percent in FY23/24 from 5.8 percent in FY22/23, primarily driven by a sharp decline in exports.