South Asia has been hard hit by a second wave of COVID-19 infections over the past few months, with India alone registering over 140,000 fatalities since April 2021. As the region slowly recovers from the devastating public health crisis, we discuss the prospects and challenges for South Asia’s post-pandemic economic recovery.

Pandemic predicaments

In South Asia, India emerged as the worst-affected country during the second wave. Under scrutiny are the administration’s policy responses and failure to forestall the second wave and the beleaguered vaccination campaign. 

The federal government’s responses have triggered widespread public censure, denting Prime Minister Narendra Modi’s popularity. However, at the federal level, the Modi-led Bharatiya Janata Party (BJP) has an overwhelming majority in the federal parliament and national elections are not due until 2024. 

As for India’s neighbour Nepal, it continues to grapple with increasing cases and fatalities even as it plunges into fresh political turmoil with snap polls due in November. Bangladesh, Sri Lanka and the Maldives have also all registered a rise in infections, though strong majoritarian governments in Bangladesh and Sri Lanka have cracked down on public criticism through arresting government critics. Meanwhile, Bhutan has administered at least one vaccine dose to more than 90% of its population.

The rocky road of economic revival

While the shock of the second COVID-19 wave will continue to strain public finances, India and Bangladesh, the key economic performers in the region, are likely to register faster but lopsided economic recoveries in the months ahead. In contrast, the economic situation will remain difficult in Sri Lanka, Maldives and Nepal. Across the region, socio-economic cleavages are likely to prolong operational challenges and regulatory uncertainty for businesses over the coming months.

India recorded its worst economic contraction of 7.3% in the 2020/21 fiscal year, aggravating an economic slowdown that had been underway even before the pandemic. The second wave will intensify such stresses, prompting more businesses to suspend or even shutter operations. 

Bringing India’s economy back on track will be Modi’s steepest challenge as he seeks to contain the political fallout from the second wave for the BJP ahead of important state polls in 2022. However, economic growth will be uneven, with India’s industrialised states, such as Tamil Nadu and Karnataka (southern India), and Gujarat and Maharashtra (western India) – all of which have a larger tax and revenue base – better placed to register faster recoveries. At the federal level, the BJP has limited wherewithal to get India’s growth back on track, with global economic headwinds, high fuel prices and falling disinvestment targets likely to limit room for fiscal spending.

Bangladesh’s growth prospects are currently steady, with the country looking on course to outperform other countries in South Asia amid the pandemic. Despite the country extending a two-month national lockdown until mid-June, Prime Minister Sheikh Hasina will continue to press on offering fiscal support to the garment sector, which generates the maximum foreign exchange revenue and is also the biggest employer. Bangladesh’s manufacturing capabilities and competitive wage environment will be a major draw for businesses seeking to diversify their supply chains in the months ahead.

In contrast, Sri Lanka, Bhutan and Maldives’ economic environment will remain strained. Tourism is the main employment and revenue generator across all three countries, and it will remain one of the worst-affected sectors in 2021. Economic stresses are also likely to prompt Sri Lanka and Nepal to increase its reliance on China’s assistance to plug revenue shortfalls, even as this will effectively compound Sri Lanka’s precarious debt servicing scenario and sovereign credibility. Any assistance is unlikely to improve Nepal’s business environment, which is set to worsen due to significant political instability ahead of the November polls. 

Economic headwinds may prompt state and municipal agencies to amend tax rates or renegotiate public contracts to shore up flagging revenues, maintaining operational and institutional challenges for businesses. For firms, detailed provincial and state-level stakeholder and regulatory assessments will remain crucial in the coming months.

Room for discontent

With leaders intent on driving a narrative of steady economic recovery to mitigate political backlash, they are likely to resort to some populist decisions. Job creation will be a major political focus area in the years ahead. Industrial and business shutdowns have led India, Sri Lanka and Nepal to record some of their highest unemployment rates amid the second wave. Lack of job prospects will raise risks of localised unrest as unions or groups seek affirmative action, wage changes or job quotas. 

Political leaders will increasingly acquiesce to such public pressure through abruptly requiring domestic or foreign-based enterprises to hire locally domiciled labour for both blue- and white-collared jobs in the coming months. These moves will heighten operational volatility, regulatory uncertainty and compliance costs for businesses. Meanwhile, leaders are likely to ease investment rules for capital-intensive sectors such as infrastructure development, energy, and manufacturing, which are all linked to job generation. 

Betting on technology 

Even as recovery in South Asia is likely to fall below more optimistic estimates from earlier this year, from a sector point of view, broader reliance on technology enterprises will continue to increase. Internet use has exploded across most of South Asia, catalysed by pandemic restrictions and increasing access to smartphones. These factors create opportunities for the growth of big technology firms and internet start-ups, especially in Bangladesh and India, which have relatively higher levels of internet penetration.

Government estimates from December 2020 indicate that technology entrepreneurs in Bangladesh received at least USD 14m in investments – predominantly focused on financial technology (fintech) enterprises. Similarly, the technology sector reportedly contributed approximately 8% of India’s GDP in 2020, and several technology start-ups reportedly received private funding totalling USD 9.1bn in 2020.  This growth trajectory has persisted despite the second COVID-19 wave and is likely to continue for the foreseeable future. Established and newer technology firms will leverage growing digital adoption in sectors such as healthcare, supply chains, fast-moving consumer goods (FMCG), and agriculture.

In contrast, capital-intensive industries – for example, infrastructure development, energy and renewables and manufacturing – will register slower growth due to credit and external financing limitations. These sectors will also remain more susceptible to local operational challenges.

However, technology firms will face constraints stemming from political perspectives surrounding technology sovereignty, data laws, taxation uncertainty, and particularly concerns over automation as a direct threat to job creation. These will prompt infrequent but strident regulatory interventions in the sector, which can manifest as new rules and intermittent enforcement towards such firms in the coming months. 


A range of issues will prolong operational challenges for businesses across the region in the coming year, including pandemic-triggered economic strain and slow vaccination rates. Increasing political and socio-economic cleavages will drive regulatory instability and operational volatility for businesses in the coming months. Considering local and regional considerations will matter more, businesses should seek to mitigate related uncertainty through monitoring and comprehending evolving local socio-economic pressures and their impact on the business landscape.  

With broader economic recovery remaining patchy, technology-based investments will remain the spearpoint, as was the case after the first wave of the pandemic. However, political concerns surrounding technology and rising automation will pose obstacles to the sector’s growth. Policy interventions surrounding technology across South Asia will trigger challenges that companies need to pay extra attention to succeed. Moreover, South Asian countries are unlikely to see widespread inoculation before end-2022. Renewed infection surges, coupled with the region’s poor health infrastructure, will threaten to dent the overall growth outlook, even for the burgeoning technology sector.

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