The South Asian economy will grow 5.1% in 2023, driven by a 6% growth of its largest economy, India, says the latest Trade and Development Report (TDR) Update of the United Nations Conference on Trade and Development (UNCTAD).

The South Asia region registered growth of 5.7% in 2022, 0.9 percentage points higher than projected in TDR 2022, it said.

According to the TDR Update published on April 12, the deceleration of the Indian economy to 6% from a 6.6 % growth in GDP in 2022 will be because of the weakening of government spending.

For 2022, India saw the positive effect of high public and private investment and consumption as well as rising exports partly being offset by higher energy import bills, which deepened the current account deficit and ate up reserves, the update said. "The Reserve Bank of India started tightening its policy stance during the spring of 2022 to limit damage caused by foreign capital outflows, a weakening currency and inflation risks. Higher financing cost slightly dented buoyant economic activity, and over-leveraging in the corporate sector may become a factor of financial instability," the report says.

Regarding global growth prospects, UNCTAD's TDR Update said the year 2023 will test the financial resilience of the post-pandemic world. "While it is difficult to predict the precise timing and contours of a financial crisis, if any, the first weeks of spring 2023 do make it clear that in an interconnected and fragile world economy, central bank decisions in advanced countries should not be taken without consideration of their wider systemic impact. This should inform policymakers' thinking when they try to find a balance between financial stability and price stability in the coming months of 2023," the report says.

It also cautioned that the age of ultra-low interest rates is giving way to one of higher interest rates. "Three entrenched legacies from this passing era will need urgent attention and action from the international community if the global economy generally, and the developing world in particular, is to end this decade in a healthier position than it began. First is the weakness of productive investment, including for the climate transition. The use of monetary policy as the main tool of macroeconomic management is the second and the third is the growing dependence on debt," the report points out.

UNCTAD suggested that the weakness of productive investment will require policymakers to take a closer examination of corporate governance and the way in which profits are generated, managed and distributed. On the use of monetary policy for macroeconomic management, the report said that it will require recovering the active role of fiscal policy and an overhaul of the tax systems in both advanced and developing countries towards higher progressivity. Reform of the international financial system to protect and expand fiscal space was also suggested. On tackling the issue of the growing dependence on debt, the agency said it will not only require a return to responsible lending and borrowing, but a new institutional architecture to better manage debt distress and restructuring.

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