# **SOUTH ASIA: TRENDS TO 2020**

**The views expressed in this and other papers associated with the NIC
2020 project**

**are those of individual participants. They are posted for discussion
purposes**

**only and do not represent the views of the US Government.**

# 

# 

# **SOUTH ASIA: TRENDS TO 2020**

# 

## Key Points

-   Economic growth is most likely to continue at existing rates, which
    would approximately double average per capita incomes by 2020.
    Southern and western India will become more prosperous but
    widespread poverty will still be evident in some parts of the
    region. Population growth rates are dropping but pressure on
    resources, especially land and water will intensify further.

-   This scenario is predicated on governments gradually changing
    policies that constrain growth. This process could speed up but
    political systems, heavily influenced by vested interests, are
    unlikely to allow that.

-   Hindu chauvinism is likely to be an increasing force in India. That
    may make the Muslim minority more susceptible to Islamist influence.
    The Pakistani military will continue to be inclined to resist
    Islamist influence but the country will remain politically
    fragmented.

-   Tensions between India and Pakistan are likely to continue and could
    escalate quickly. International diplomatic efforts may be needed to
    avoid all out war possibly leading to the use of nuclear weapons.
    Afghanistan will remain a cause of concern for Pakistan.

-   India is building links with East Asia including China and it seems
    to be taking less rigid approaches in international forums. It may
    well play an increasingly active and influential role in
    international affairs.

-   Pakistan is drawing closer to the Middle East. Sales of its advanced
    weapons systems including weapons of mass destruction technology
    might meet the perceived needs of purchasers in the region and
    provide export earnings for Pakistan.

## Introduction

# Plausible scenarios for South Asia over the next 20 years cover a range of possibilities. At one extreme, tensions within and between states are managed successfully, governance improves significantly, and impediments to economic performance are systematically removed. Under such a scenario, living standards could be rising rapidly by the end of the period. At the other extreme are scenarios which involve inter-communal conflict and war between states, including possibly the use of nuclear weapons. The result could well be a chaotic region in humanitarian crisis. The base scenario described in this paper lies somewhere between the two extremes. It postulates a continuation of trends over the last twenty years, with tensions within and between states and modestly but unevenly rising living standards. Factors that might push actual developments towards one of the extremes are examined.

## Background

2.  The last two decades have seen reasonable economic growth in most
    South Asian countries, albeit modest by East Asian standards. In
    India, which accounts for about three-quarters of the population of
    the subcontinent, real per capita gross domestic product increased
    by 3.4 percent a year between 1981 and 1991 and by 4.2 percent
    annually over the next ten years. The implication is that average
    incomes roughly doubled over the two decades. Nepal and Sri Lanka
    performed somewhat better on this count, while Bangladesh lagged in
    the 1980s but picked up in the 1990s. Pakistan grew at about the
    same rate as India in the 1980s but very slowly in the 1990s. Other
    development indicators have also shown improvements. In most
    countries population growth is slowing: the World Bank expects total
    numbers to increase by about 31 percent to 1.78 billion between 2000
    and 2020, after growing by over 60 percent in the preceding 20
    years.

3.  Economic growth has not been evenly spread. The western Indian
    states (Gujarat, Haryana, Maharashtra and Punjab) have average
    incomes some two to three times those in northern and eastern
    states. Average incomes in southern states are between the two
    extremes. In recent years, growth has been concentrated in a few
    sectors, which employ predominately highly educated staff
    (information technology, telecommunications and financial services),
    many in the south, which is also the source of a disproportionate
    number of offshore workers. Indian incomes have almost certainly
    become less rather than more equal. Between 25 percent (in Sri
    Lanka) and 42 percent (in Nepal) of people have incomes below
    national poverty lines.

4.  There is a widely held view that better policies over recent years
    would have increased growth rates in all South Asian countries.
    India successfully overcame a balance of payments crisis in the
    early 1990s and somewhat reduced constraints on foreign trade; both
    imports and exports grew much more rapidly than gross domestic
    product during the 1990s. There was also some easing of the regime
    regulating firms, but the regime and its implementation still
    severely slow and discourage investment. Inadequate infrastructure
    also constrains economic activity, as do the high cost of capital
    and the risks posed by India\'s weak public finances.

5.  Domestic politically motivated violence and the effects of conflicts
    in neighbouring countries have marked the region. But open
    inter-state conflict has been largely avoided, since 1971, except in
    Afghanistan.

**The Base Scenario**

6.  Continuation of the trends evident in India over the last 20 years
    would result in per capita incomes again doubling. The required
    average annual growth rate of about 3.5 percent together with the
    World Bank projected population growth of about 1.2 percent per
    annum imply gross domestic product (GDP) growing by some 4.8 percent
    a year. This is significantly below the rates observed over the last
    two decades, when population growth rates were higher. There is
    potentially enough headroom in India\'s trend performance to project
    a doubling of average incomes across the region, even if Pakistan
    (and possibly Bangladesh) lags, as may well be the case.

7.  Demographic and social factors should, on balance, increase growth
    rates over the next two decades. Slower population rates are
    expected to cut dependency rates in the region from 65.5 percent in
    2000 to 49.4 percent in 2020. Taken together with increasing
    educational achievement (higher literacy rates and more students
    going beyond primary school), both the quantity and the quality of
    the labour force should continue to rise. Harnessing these forces
    will require the opening up of appropriate job opportunities. Were
    regional disparities to persist and labour mobility to be
    constrained (including by social pressures), there could be pockets
    of labour shortage and other areas with increasing unemployment,
    including of well educated workers. The latter would be a potential
    threat to social stability. Further demographic pressure on rural
    environments and falling qualities of lives in increasingly crowded
    urban areas could also generate tensions. The effects of HIV/AIDS on
    population trends, including dependency rates, in South Asia are not
    yet clear.

8.  India\'s experience over the last two decades demonstrates that
    modest liberalisation of the economy can have significant effects on
    economic performance. This base scenario assumes that the
    authorities further ease the regulatory regime in a way that
    sustains growth. But the liberalisation envisaged would still be
    constrained by complex political bargaining and thus be piecemeal
    and gradual rather than radical or rapid. We see the growth being
    financed mainly from domestic savings, supplemented by the Indian
    diaspora who would also contribute disproportionately to technology
    transfer and the connections needed to build exports of goods and
    services. This is akin to the role of overseas Chinese with respect
    to China. We do not envisage other foreign direct investment being
    the key driver of growth on the subcontinent, especially in the near
    term; potential investors perceive that projects elsewhere will
    yield higher returns and be less problematic.

**The constraints**

9.  Public finances, and government management more generally, remain
    major impediments to growth. Substantial fiscal deficits in India
    (currently perhaps 10 percent of GDP for the federal and state
    governments collectively), together with an inefficient financial
    sector and policies that direct considerable lending to social
    priority sectors, result in high borrowing costs. This, together
    with a still rigid regulatory system (and its associated corruption)
    discourages investment by firms, especially those that are not well
    connected. Fiscal pressures constrain government investment in
    infrastructure such as roads and electricity systems needed to
    support growth. Fiscal deficits have been primarily domestically
    financed; external debt servicing is generally manageable, at least
    in the short run, except in Pakistan. Improving public finances
    would seem to require both revenue enhancement and the reduction of
    poor quality expenditures (for example on ill-directed subsidies).

10. A general improvement in economic management would, on the face of
    it, result in GDP growth rates markedly higher than the five percent
    or so projected in the base scenario. But rapid change is probably
    not politically feasible: present indications are that none of the
    South Asian states is likely to have executive branches secure
    enough to survive the resulting political fallout. Sectors and
    regions left behind would almost inevitably use political means,
    both to block reforms that affect their interests and to capture
    part of the gains.

-   National politics in India have acquired regional and religious
    elements and the centre has only limited control over state fiscal
    management. Despite this, we see no signs of moves towards
    authoritarianism in India; we expect parliamentary democracy to
    remain largely unchanged.

-   Politics in Pakistan are deeply divided and any civilian government
    would, on past trends, be quickly captured by vested, land owning
    interests. The Islamic parties are unlikely to be a force for rapid
    development. Military led governments tend eventually to succumb to
    the same influences.

-   Sri Lanka may be an exception since rapidly rising incomes could be
    a reconciling force between ethnic groups.

11. Land and water are already under pressure in much of South Asia,
    especially in India. That will intensify over the next twenty years
    as populations rise and surface and ground water is increasingly
    polluted. Tensions over water could increase, both within and
    between countries. Imported food could reduce some of these
    pressures, especially in intensively irrigated areas, but would
    intensify political opposition to structural change. Internal
    migration could ease some of the pressures on rural land and water
    but would also accentuate social problems, especially in cities.
    Periodic flooding will remain a problem for Bangladesh.

**Domestic tensions**

12. Realisation of the base scenario would result in western and
    southern Indian states continuing to grow more quickly than those in
    eastern and northern India. This would further widen gaps between
    the states. Resource transfers might somewhat alleviate the likely
    sense of deprivation in the lagging areas but could, in turn,
    generate some grievance in the leading states. The latter could be
    accentuated by the likely failure of the central authorities fully
    to implement the policies that would maximise growth. The resulting
    tensions are likely to be resolved through existing political
    structures since the dynamic areas gain economic and security
    benefits from the larger Indian state able strongly to influence an
    uncertain region. Disputes over resources, including differences
    over leased land may involve violence but will almost certainly
    remain localised. And minorities in the northeast and in Kashmir
    continue to harbour secessionist sentiments.

13. Hindu chauvinism is likely to be an increasing force in India. That
    will inevitably further alienate the Muslim minority, possibly
    making it more susceptible to external Islamist influence. Until now
    Islamist terrorism in India has been predominately associated with
    the Kashmir dispute; that could change, with potentially serious
    consequences for Indian domestic security. Despite Prime Minister
    Vajpayee\'s inclination to improve relations, the Hindu influence
    now evident in Indian politics reinforces the religious element in
    tensions with Pakistan (and potentially Bangladesh).

14. Developments in Pakistan will continue to reflect complex
    interactions between the landowner dominated areas of the Indus
    river valley, the 1947 refugees from India and their descendants who
    are disproportionately located in Karachi, and the tribal peoples
    based in North West Frontier Province (NWFP) and Baluchistan. The
    latter tend to be militantly Islamic and some have close connections
    with the Pashtuns of Afghanistan. The resulting lack of cohesion
    makes governance of Pakistan particularly fraught especially with
    the landowners divided. The military is the only strong national
    institution and is likely to continue to play a key role in
    governance even after Musharraf vacates one of his positions. We see
    no signs that Pakistan will soon emerge as a more cohesive state
    under a civilian administration, able to foster the development
    needed to raise living standards sharply, and willing to reach an
    accommodation with India. Given past failures of governance,
    Islamist influence could grow to dominate the country, although the
    military would be inclined to resist, and Punjabi and Sindhi leaders
    would not easily surrender their leading political role.

15. A ceasefire was concluded in Sri Lanka in February 2002 and appears
    to be holding. Sri Lanka has a number of favourable conditions for
    growth (particularly an educated workforce and an inclination to be
    outward looking). By 2020 Sri Lanka could much more resemble the
    Southeast Asian countries than the rest of South Asia. Rapid growth
    would help lock in peace.

**Inter-state conflict in the region?**

16. Kashmir remains the focus of tension between India and Pakistan,
    although disputes could also arise over water flows in the Indus
    River. Neither side is inclined to back down over Kashmir and, in
    fact, could not do so without risking considerable political damage.
    Pakistan is unlikely directly to attack Indian controlled Kashmir
    but will continue to facilitate militant activities and to provide
    some military backing at the border. Such support would probably
    increase were Islamists to gain greater political influence in
    Pakistan or if the military were somewhat alienated from a weak
    civilian government.

17. So long as militant activities are largely restricted to Kashmir and
    do not threaten its control of the area, India would probably avoid
    significant military incursions into Pakistan, although it will not
    necessarily respect the line of control in efforts to constrain
    infiltration. Any escalation of tensions could lead quickly to
    widespread conflict. Under plausible scenarios Pakistan would use
    nuclear weapons to counter success by the larger Indian conventional
    forces, particularly given its lack of strategic depth. The
    consequences would be dire. Suggestions that the Kashmir dispute was
    escalating would, however, quickly attract intense international
    pressure designed to defuse the situation. Both principals appear to
    rely on such international intervention to prevent a crisis from
    spinning out of control.

18. Similar tensions would arise were elements in Pakistan to support
    more militantly Islamist groups that might emerge from within
    India\'s Muslim community, especially in response to Hindu
    chauvinism.

19. Pakistan will continue to monitor the situation in Afghanistan
    carefully and would intervene were it to perceive a sufficient
    threat, especially had international forces left the country. Indian
    links with elements of the Northern Alliance are an exacerbating
    factor for Pakistan.

20. Conflict involving other states in the region is less likely but
    India might intervene in Bangladesh, Bhutan or Nepal if it felt
    vital national interests were at stake. The likely reaction of
    external powers, especially China, would be an important element in
    Indian decision making in the lead up to such action.

**External relations**

21. The changing international situation after the cold war, the
    aftermath of its nuclear tests and the gradual opening of the Indian
    economy have been accompanied by some redirection of Indian foreign
    relations. This is probably most noticeable in its efforts to build
    stronger links with East Asia, including China. It clearly wants to
    be an integral part of a wider Asian region with which it sees
    economic synergies especially with China. It has also sought to be
    more open to western countries, especially the United States, and
    seems to be taking less rigidly dogmatic lines in international
    forums. India seems intent on playing a more active international
    role. Links with the Middle East, particularly Iran, have been
    pursued both to help ensure access to oil supplies and to
    counterbalance Pakistani ties with the region. These trends are
    likely to continue and will be driven by very active pursuit of
    perceived Indian interests, including a desire to wield influence
    more in keeping with its size.

22. While India remains wary of China, the complementarity of their
    interests suggests that relations are more likely to improve than to
    deteriorate sharply in the period to 2020.

23. Prior to 11 September 2001, Pakistan was relatively and increasingly
    isolated from all but the Sunni Middle Eastern states. The campaign
    against terrorism has given Pakistan renewed relevance to the United
    States but the relationship seems fragile. Pakistan is likely to
    continue building links with the Middle East, especially Sunni
    countries. Sales of military equipment, including weapons of mass
    destruction technology would meet the perceived needs of purchasers
    and provide export earnings for Pakistan. Unlike India, it will play
    no more than a regional role.

**The drivers**

24. All of the drivers identified in Global Trends 2015 may have
    profound effects on the South Asian region in the period to 2020.

-   The **demographic** transition currently underway in the region will
    result in population increasing by 31 percent between 2000 and 2020,
    compared to about 60 percent in the preceding twenty years. But
    pressure on resources will intensify, albeit more slowly. Dependency
    ratios will drop as families have fewer children. Taken together
    with increasing educational achievement the result will be a larger,
    more skilled labour force. If job opportunities do not open up,
    unemployment, particularly of well educated workers, could be a
    threat to social stability. HIV/AIDS increases the uncertainty of
    these projections.

-   Pressure on **natural resources and the environment**, particularly
    land and water, will intensify as populations increase and water
    sources are increasingly polluted. That could intensify tensions
    within and between countries.

-   **Science and technology** have played important roles in recent
    Indian growth. The growth of a computer industry oriented to
    providing services for export is the most notable example but there
    are others, including low cost vaccines and pharmaceuticals. We
    expect that trend to remain important and to involve a broader range
    of products. Science and technology may also provide some increase
    in agricultural productivity and reduce the demand for irrigation
    water. Potentially, that could lift incomes among the rural poor and
    reduce some political pressure against reform policies that could
    lift overall growth.

-   Most South Asian countries have become more integrated into the
    **global economy** in recent years. For instance, Indian exports of
    goods and services grew about twice as fast as GDP between 1991
    and 2001. But South Asian countries have not been seen as
    particularly attractive destinations for foreign direct investment.
    We expect that the links between South Asian economies and the rest
    of the world will further intensify in the years ahead but the
    process will vary both by country and over time.

-   **Governance** is likely to remain a significant problem in all
    South Asian countries. Inefficiencies and other problems in
    administrative and judicial systems undoubtedly have very
    substantial costs. Executive branches are neither strong nor stable
    and often subject to the wishes of powerful vested interests. This
    severely constrains their ability to introduce and implement better
    policies. The few arrangements designed to build co-operation
    between regional countries are not particularly effective. India, in
    particular, is seeking to build its connections and influence in the
    wider Asian region and is likely to play a more realistic and
    effective role in multilateral organisations.

-   **Conflict** in South Asia over the period to 2020 could be at
    several distinct levels. Militants, supported from within Pakistan,
    will continue to use relatively low level violence to challenge
    governance arrangements in Kashmir. There would also seem to be a
    risk that Indian Muslims, under pressure from Hindu chauvinism and
    influenced by Islamist ideology may, possibly with external
    assistance, resort to violence. At the other extreme, tensions
    between India and Pakistan could rapidly escalate into a conflict
    that might see the use of nuclear weapons. Some level of conflict is
    likely to continue in Afghanistan as the ethnic groups compete for
    territory and influence. There are a number of other possibilities
    for conflict within and between states in the region.

-   As India has become more integrated with global systems its
    interests have become more congruent with those of the **United
    States** and it has been inclined to build closer links. That
    process was, to a limited extent, interrupted by the role that
    Pakistan was and is playing in the campaign against terrorism. The
    underlying trend is likely to continue but India will resist what it
    sees as inappropriate pressure. And it will jealously guard its
    influence in the region. The United States, along with other
    countries, would actively seek to avert any pending war between
    India and Pakistan.

25. The drivers used in Global Trends 2015 provide a good explanation of
    most expected developments in South Asia to 2020. It would seem,
    however, that the set would be enhanced by the inclusion of a driver
    that directly addresses clashes of ideas (ideology or religion).
    This has obvious relevance to Islamic terrorism but, in the South
    Asian context, could also be applied to Hindu chauvinism. It could
    also be used in a secular context in some disputes over economic
    organisation and governance. The conflict driver picks up some of
    the consequences of clashing ideals but the resort to violence is
    often preceded by a long period of increasingly acrimonious debate
    and agitation.

26. Developments in South Asia also suggest that regional architectures
    are changing. Closer links between India and East Asia reflect the
    growing economic importance of East Asia and moves by countries in
    that region to build coherent regional structures. This process is
    by no means as advanced in Asia as it is in Europe and North
    America. There are signs of similar tendencies in South America. The
    underlying changes in trading patterns can be attributed to the
    globalisation driver, but there are elements of recent moves to
    regional economic arrangements that reflect dissatisfaction with the
    multilateral system. That would not seem to justify a separate
    "regionalisation" driver but is a factor in the operation of the
    globalisation driver.

**Wild cards and surprises**

27. Both Hindu chauvinism and the spread of militant Islamist ideology
    could lead to much greater division in Indian society. Our
    understanding is that militant Islamist influence in the Indian
    Muslim community (outside Kashmir) has, until now, been surprisingly
    modest. These forces could interact to reinforce each other. The
    results could include large-scale dispossession of Muslims and
    population movements, and widespread terrorism in India. A more
    authoritarian (probably Hindu dominated) government could emerge,
    almost certainly from within the parliamentary system. Economic
    performance would undoubtedly deteriorate markedly, even in areas
    not directly affected by inter- communal violence.

28. A sharp rise in Islamist influence in Pakistan, including over the
    military, could lead to the country becoming an officially
    sanctioned base for Islamic terrorists. This could, potentially,
    lead to a much more potent terrorist threat than has hitherto
    existed. At its most extreme, it could give Islamic terrorists
    access to well-developed weapons of mass destruction. Short of such
    a situation, terrorist access would, at most, probably be restricted
    to knowledge passed on by skilled sympathisers from within the
    system.

29. It is not clear that either Pakistan or India would survive as a
    viable state following a nuclear exchange. Natural disasters and
    disease (including potentially HIV/AIDS) also have the potential to
    severely disrupt South Asian countries.

30. A sharp increase in the pace of economic restructuring could lift
    growth rates in India (and in other regional countries) provided
    that domestic and regional tensions are managed satisfactorily. The
    possibility of Indian growth rates by 2020 emulating those in China
    over the last two decades or so cannot be ruled out. That would,
    undoubtedly, further boost India's role in the world and Asia.

20 November 2003