An increase in economic activity in India will accelerate growth in South Asia to 6 per cent in 2015 and 6.4 per cent in 2016, potentially making it the second fastest-growing region in the world after East Asia and the Pacific, according to the World Bank.
India, which accounts for 80 per cent of the region's output, is set to grow 5.6 per cent in the current financial year (FY2014-15, ending 31 March 2015), accelerating to 6.4 per cent in the next fiscal year (2015-16) , the World Bank said in its twice-a-year South Asia Economic Focus.
India is the biggest economy in a region that has also the world's largest concentration of poor people, the report pointed out.
Other countries in the region are Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka
India's economic activity has been buoyed by expectations of the newly-elected government of Prime Minister Narendra Modi, "India is benefiting from a "Modi dividend"," the Bank said in its report released on Monday.
A recovery in the US economy that would provide a market for Indian merchandise and service exports would further support economic growth in India over the next year or so, the report added.
"The outlook over the next years for South Asia indicates broad economic stability and a pick-up in growth with potential risks concentrated on the fiscal and structural reform side," said Martin Rama, chief economist for South Asia at the World Bank. "Future growth will increasingly depend on strong investment and export performance," he added.
Private investment is expected to pick up thanks to the government's business orientation, and declining oil prices should boost private sector competitiveness.
The report notes that while all developing economies are vulnerable to the effects of monetary tightening in a recovering US economy and of stagnation in the weaker euro zone, the bigger effects on the fortunes of the region could come from domestic developments.
Political turmoil and non-sustainable fiscal policies could undermine stability and investor confidence, whereas sound macroeconomic policies and economic reforms could spur faster growth.
Exports have been buoyant for many South Asian countries, growing in double digits in several of them, the report noted.
While sales abroad were boosted by favorable tailwinds, such as the depreciation of the Indian rupee in 2013, increased diversification by type of product, the report said, countries in the region should build on this strength.
''As East Asian labour costs increase, South Asia has an opportunity to become the manufacturing hub of the world; but achieving this will require boosting competitiveness.''
Much will also depend on economic reforms for India to achieve its full long-term growth potential, the report pointed out.