South Asia: Editors' Overview

This special issue of the Asian Economic Policy Review examines the economic development of four economies of South Asia,¹ Bangladesh, India, Pakistan, and Sri Lanka. Over the past 38 issues of the journal, we have had 2 issues devoted to India (Vol. 3, No. 2 and Vol. 14, No. 1), but not even 1 paper focused solely on Bangladesh, Pakistan, or Sri Lanka. This issue of the Asian Economic Policy Review attempts to fill that gap.

South Asia is the world's most populous region, comprising 21% of the world's population. However, poverty is widespread and the economies are relatively small in global terms: they generate 5.2% of global output, indicating that their average per capita income is about one-quarter of the global figure.²

Although Bangladesh and Pakistan have very large populations (173 million and 240 million, respectively), India, the world's most populous nation with 1,429 million people, dominates South Asia's economy, politics, and demographics. India is now the world's fifth largest economy measured at official exchange rates and the third largest as measured by purchasing power parity exchange rates.

Since independence in the late 1940s (1947 for India and Pakistan, 1948 for Sri Lanka),³ the region has experienced mixed economic fortunes. Kathuria (2025) characterizes the early post-independence period as one of “wasted decades.” Over the long sweep of economic development, from 1950 to 2016 real global per capita income in international prices increased 4.4 times. The increases in India (4.3 times) and Pakistan (4.4) were very similar to the global average. Sri Lanka grew faster (7.6), while Bangladesh was slower (2.9).⁴ As van der Eng (2025, figure 1) shows, at the time of its independence Sri Lanka had the region's highest per capita income by a substantial margin, followed by Bangladesh, Pakistan and India. Until its recent macroeconomic crisis, Sri Lanka continued to be the most prosperous country, but India has overtaken both Bangladesh and Pakistan. Pakistan is now the poorest of the four, again by a substantial margin.

Sri Lanka is also the region's leader as measured by social indicators. In 2021, its human development index was 0.78, much higher than India (0.63), Bangladesh (0.66), and Pakistan's very low 0.54. Sri Lanka is the leader, and Pakistan the laggard, with respect to various indicators, including education, health, poverty, and gender equity. Moreover, notwithstanding the region's egalitarian rhetoric, poverty has also generally been less responsive to economic growth than it has in Northeast and Southeast Asia (hereafter referred to as East Asia). South Asia has yet to experience the rapid, labor-intensive, export-oriented industrialization that has had transformational labor market effects in much of East Asia. One important factor is the relatively low labor force participation rates, exceptionally so for females (World Bank, 2024; Kathuria, 2025). Consistent with the process of economic development, as incomes rise agriculture is shedding labor. However, the nonagricultural sectors are not providing good jobs in sufficient numbers, in turn limiting the opportunities that arise through the demographic dividend.

These development outcomes are explained by the countries' initial conditions and economic and social policies adopted since independence. The countries' colonial origins resonated for decades after independence. Given the countries' British colonial background, the region's educated elites typically studied in the United Kingdom with London and Oxbridge being favored destinations, where they were attracted to Fabian socialism, a factor contributing to the post-colonial adoption of inward-looking development strategies. The influence of the Bank of England was also felt, initially with currency board arrangements and subsequently with monetary prudence. The early leaders spoke the same language, literally and figuratively, which makes the regional disharmony of the independence era all the more difficult to understand.

Three of the countries had traumatic beginnings owing to the 1947 partition. Bangladesh, formerly East Pakistan, fought a costly war of independence. Viewed from the 2020s, and to oversimplify greatly, the countries that are now experiencing the most serious economic and political challenges were initially expected to perform well, while the converse is also true. Sri Lanka was regarded as the “model colony,” to employ Lee Kuan Yew's envious characterization, and it appeared to possess all the preconditions for rapid economic development—excellent human capital indicators (including low gender disparities), a functioning political system, a well-established administrative apparatus, and a pivotal geographic location. Pakistan also appeared to have good prospects, with a dynamic entrepreneurial class and close relations with the USA. By contrast, there was much pessimism about prospects in India and later Bangladesh: India turned inward, its economy was administered by the famous “license raj,” and its development trajectory was characterized as the “Hindu equilibrium” of 3.5% economic growth, that is, 2.5% population growth and 1% per capita gross domestic product (GDP) growth. War-ravaged Bangladesh was widely regarded as a basket case in the 1970s, with little prospect of economic development.

That these early expectations were not realized owes much to subsequent political and economic developments, as the contributors to this volume explain. After disengaging systematically from the global economy in the late 1960s and early 1970s, Athukorala (2025) highlights that Sri Lanka was actually the first country in the region to liberalize its trade and investment regime, in 1977. Although the liberalization was incomplete, it had immediate results and led to accelerated export and economic growth. However, the reforms were overtaken by a prolonged and increasingly vicious ethnic-based civil war from 1983 to 2009. The subsequent recovery was further nipped in the bud by spiraling corruption and fiscal adventurism during the Rajapaksa years. It was finally the COVID pandemic and rising global interest rates that precipitated the country's most serious macroeconomic crisis in its independent history, commencing in 2021 and continuing to the present.

Panagariya (2025) shows that India finally began to discard the shackles of the license raj in the 1980s, as economic growth began to accelerate, driven by partial reforms and expanded borrowings. However, this debt-driven strategy precipitated a fiscal and debt crisis in 1991, triggered in part by rising oil prices in the wake of the First Gulf War. Consistent with the crisis-reform hypothesis, the government responded by embarking on a series of major liberalizing reforms which, with a lag, resulted in historically rapid economic growth. Panagariya (2025) stresses that these and subsequent reforms have basically enjoyed bi-partisan support ever since, and have set the stage for the country becoming a global economic superpower.

Moreover, as Ray and Mohan (2025) document, since May 2016 India has adopted a “flexible inflation targeting” (FIT) regime whereby the central government sets the inflation target and its bounds. Ray and Mohan's evaluation of FIT is that average inflation rates observed during the 1995–1996 to 2007–2008 period are quite comparable with those during the FIT years (from 2016 to the present) with the period 2008–2009 to 2012–2013 being viewed as an aberration in India's inflation history. In addition to monetary policy, Ray and Mohan also examine the health of Indian's banking sector and advances in digital payments infrastructure. The health of Indian's banking system has improved significantly after 2017 as a result of legislation to simplify and accelerate bankruptcy procedures, a strengthening of the Reserve Bank of India's (RBI) surveillance procedures, and government efforts to recapitalize the banks. The establishment of the Unified Payments Interface (UPI) that allows merchant payments with Single Application or In-App Payments, as well as different utility bill payments and QR Code (Scan and Pay) based payments, is viewed as a game changer.

Bangladesh is the unexpected success story in South Asia. At the time of independence, it was one of the poorest countries in the world. It appeared to have little prospect of economic development, a judgment confirmed by its first two, turbulent decades. However, the more settled political environment from the 1990s created economic opportunities. Principal among these, as described by Ginting et al. (2025), has been its spectacular success as one of the world's leading garment exporters. The growth has been driven by three main factors: an initial exploratory investment from Korea which quickly had spillover effects; pro-active government policies that facilitated the industry's expansion; and concessional export market access in Organisation for Economic Co-operation and Development (OECD) markets. This rapid, labor-intensive export expansion has had transformational labor market impacts. Combined with two successful and influential nongovernmental organization's (NGO), the Grameen Bank and BRAC, garment exports have been the primary driver of the country's fastest improvement in human development indicators in South Asia this century. However, Ginting et al. (2025) also stress the limits to this growth path, including its narrow export base, very limited technological upgrading and spillover to other sectors, and the likelihood that the privileged export market access arrangements will soon expire.

Pakistan's development record is a history of missed opportunities, as documented by van der Eng (2025). Once a leader among the large South Asian economies, in the decade from 2010 it was overtaken first by India and then by Bangladesh. Notwithstanding the difficult external environment, including the prolonged conflict in Afghanistan, regional religious tensions, environmental catastrophes, and the standoff with India, its problems are essentially home-grown. Its politics has been dominated by a narrow clique drawn from the military, a dynastic political class, and a small business elite. Unable to finance even the most basic economic and social needs, successive governments have resorted to external finance but without the capacity to create debt-service capacities. The result has been a series of revolving-door International Monetary Fund (IMF) rescue packages. It is perhaps no exaggeration to regard it as a “semi-failed state” (The Economist, 2024), moreover one that is nuclear-armed and not at peace with three of the four states with which it shares a land border.

Standing back, three differences with the development trajectories in East Asia are evident. First, the turning points involving the adoption of outward-looking economic development and accelerated economic development, such as China in 1978, Indonesia in 1966, Vietnam in 1986, are not clearly evident. The closest examples are India in 1991, Sri Lanka in 1977, and Bangladesh in the 1990s. But even in these cases, and notwithstanding the clear reform dividends in all three, there continues to be a pronounced ambivalence toward globalization (Kathuria, 2025). Second, the vast, dynamic global production networks that have integrated the economies of East Asia, and in turn linked them to global markets, have barely taken root in South Asia, in spite of its shared colonial heritage and language. At the most mundane level, there are barriers to the movement of people within South Asia. Only tourism-dependent Nepal and Sri Lanka have had relatively open regional and international borders to the movement of people.

Third, regional integration initiatives are minimal (Kathuria, 2025). The South Asian Free Trade Area (SAFTA), which took effect in 2006, is clearly a misnomer, as are the various extra-regional bilateral agreements that countries have signed. Each country maintains extensive lists of sensitive and excluded items, and their trade regimes are becoming more restrictive. The countries also generally eschew mega-regional trade agreements. A notable example is India's decision to withdraw from the Regional Comprehensive Economic Partnership negotiations, and its periodic rice and other export bans. As has been the case in East Asia, unilateral liberalization will always be the most effective trade reform strategy, but it would in turn increase regional economic integration owing to geographic proximity and cultural familiarity, an example of open regionalism.

South Asia's institutional development has also tended to lag. Admittedly, forms of democracy have taken root in the region, arguably more so than in any other major developing region. All four countries are classified by Freedom House (2023a,b,c,d) as “partly free,” as they have been for most of their independent histories, with scores (ranging from 0 to 100 for least to most democratic) of 66 for India, 54 for Sri Lanka, 40 for Bangladesh, and 37 for Pakistan. However, as Subramanian (2025) observed in his commentary on Kathuria (2025), “majoritarian” political cultures are evident, with challenging implications for ethnic and religious harmony, and also for the business environments. In fact, most international rankings suggest a mixed picture. For example, the countries' rankings on Transparency International's (2024) corruption perception index are broadly similar to, or below, their per capita income rankings. Of the 180 countries for which estimates are provided for 2023, the country rankings range from India at 93 to Bangladesh at 149; Pakistan (133) and Sri Lanka (115) occupy intermediate positions.

What of the future? Political, economic, and environmental uncertainties abound, especially if, as suggested by some IMF economists, the global economy is entering a period of “high-debt low-growth” (Adrian et al., 2024). In such a scenario, one can be reasonably confident about continued economic growth only in India. Notwithstanding the many caveats about that country's growth projections, including looming environmental threats, its alleged democratic regression, and distributional outcomes, its political and business environment appear to be settled, its macroeconomic house is in order (even with its high public debt), its huge domestic market is well placed to navigate external shocks, and the country's has unparalleled economic and diplomatic heft, particularly in a polarized world.

For the two debt-crisis economies, Pakistan and Sri Lanka, the immediate challenge is to restore macroeconomic stability, implement their debt negotiation programs, and return to growth. There is ample evidence in international debt crisis experiences that recovery is feasible, for example, as occurred in the aftermath of the 1997–1998 Asian Financial Crisis (AFC). In both Pakistan and Sri Lanka, however, the path to recovery is complicated by polarized political communities, the difficulty of forging a negotiated consensus among international creditors (particularly but not only with China), and economies with over-sized non-tradable sectors that increase the effective debt-service burden. The longer the recovery is delayed, the more difficult will the problems become, exacerbated by the exodus of human capital already evident, and the propensity for renewed political conflict. In early 2024, the obstacles look particularly serious in Pakistan.

Bangladesh's future depends critically on whether the reforms advocated by Ginting et al. (2025) can be implemented. The country's great advantage is that its recent history has clearly indicated that it can grow fast and reduce poverty quickly. Although it has signed a precautionary agreement with the IMF, its macroeconomic fundamentals are basically sound. It has the capacity to follow the East Asian “flying geese” model by diversifying into a wider range of manufactures. There are no insuperable technical barriers for adopting such a strategy, even in the more crowded and competitive international market place. Given its polarized politics, the country is at the crossroads: it is now up to the country's political, business, and bureaucratic elite to decide which path to take.

It needs to be noted also that the papers in this issue were written for a March 2024 conference and revised for publication shortly thereafter. Since then, there have been important political developments in Bangladesh, India, and Sri Lanka which, especially in the case of Bangladesh, may affect the region's development outlook.

Bangladesh's long-serving prime minister Sheikh Hasina was ousted on August 5 and she immediately went into exile following weeks of popular and increasingly violent protests, the result of her deeply unpopular and authoritarian leadership, and the rigged national elections of January 7. An interim government headed by the respected Nobel Laureate Muhammad Yunus has been installed to rebuild institutions and to chart a return to democratic government. The political unrest has had adverse economic consequences. At the time of writing, it is unclear whether, and how quickly, Bangladesh's economy will recover, and whether it portends major changes in the country's development strategy.

Sri Lanka had a presidential election on September 21 that resulted in a decisive leftward shift in its politics. The successful candidate, Anura Kumara Dissanayake, then dissolved the parliament and called for new elections, which his party won with an overwhelming majority. Unlike in Bangladesh earlier in the year, both the presidential and parliamentary elections were legitimate and the results uncontested (a not insignificant achievement given the country's deep economic and political crises). But here too it is unclear whether the new government will fundamentally change economic policies. An immediate challenge concerns the ongoing debt negotiations with the IMF and its creditors.

The Indian elections held during the months of April, May, and June, which were also conducted fairly, resulted in Prime Minister Modi losing his parliamentary majority and for the first time being forced into a coalition with some minor parties. Although PM Modi's political authority has been somewhat diminished, it appears unlikely that there will be any fundamental changes in Indian economic policy.

This section summarizes the papers presented at the 39th Asian Economic Policy Review Conference held online on March 22, 2024, the comments by the assigned discussants, and the general discussion of each paper. The appendix contains list of conference participants.