# **1. Introduction**

The COVID-19 pandemic is having a deeper impact on South Asia. The World Economic Outlook of the IMF predicts that in 2020 the world economy will contract by 4.4%, while real GDP in India is expected to decline by 10.3%. Afghanistan, Pakistan and Sri Lanka will enter into recessions while the region as a whole is expected to contract by 8.4% (IMF, 2020). Governments in the region have introduced a number of interventions, ranging from delays in payments on taxes and debt service to increasing liquidity (World Bank, 2020b). These interventions were done amid ongoing fiscal stress and socioeconomic challenges, including social inequality and lack of opportunities for certain groups. Along with other developing economies, countries in the region face greater risk of not only reversing advances in sustainable development (Schneider et al., 2021), but also deepening existing vulnerability problems if sound policies are not in place.

This paper explores the impact of COVID-19 on South Asia using a global database of over 100,000 firms collected by the World Bank. It uses the Business Pulse Surveys (BPS) in 30 countries, and the World Bank Enterprise survey data in 21 countries.<sup>1</sup> This paper is organized around the following three core questions. _First_ , how is COVID-19 impacting South Asian firms relative to those in other regions and countries? To this end, we examine in-depth the usual target groups of "vulnerable" firms, namely: (1) micro and small firms; (2) sectors, especially the hardest hit ones; (3) female-led firms; and (4) exporters. _Second_ , how are South Asian firms adjusting to the COVID-19 related economic disruptions? We look into adjustments on employment, digitization and the propensity to pivot product-mix. _Third_ , what is the role of policy in supporting South Asian firms during crisis and recovery? This paper argues that size and sector are imprecise targets for policies supporting firms, given the wide variation in the impact of the pandemic within these groups. Results underscore the possible mismatch in the perspective of the firms and policy makers, with firms’ preferred instruments being attributed predominantly to the most significant channel of transmission of the shock as opposed to their external attributes. Consequently, it provides a framework for customizing firm support by looking into the channels of transmission of the shock.<sup>2</sup> In addition to its impact on the region’s economies, the COVID-19 pandemic may also aggravate the existing differences in dynamics by firm size, exacerbate gender inequality and expose the vulnerability of export industries. For instance, self-employed and micro-enterprises represent over 80% of employment in South Asia, compared to about 50% in the East Asia and Europe and Central Asia regions (Mukhtarova, 2020). In the BPS data, only 9% of South Asian firms are women-led, compared to 35% and 36% in EAP and LAC, respectively.<sup>3</sup> Within sectors, COVID-19 paralyzed the export-oriented tourism in Nepal and caused a massive decline in Bangladesh’s ready-made-garment

> 1For information on BPS, see Apedo-Amah et al. (2020) and Appendix Figure A.1 for the timing of surveys in SAR. Although the survey was conducted in India along with other SAR countries, we do not divulge country specific figures for any of the outcomes.

> 2COVID-19 affects firms through five distinct channels: (i) reduction in demand (ii) disruption in production and supply chains (iii) unavailability of liquidity and financial services (iv) uncertainty of the extent and time horizon of the shock, (v) lock-down restrictions (Apedo-Amah et al., 2020).

> 3Moreover, the World Development Indicators (WDI) reveal that female labor force participation rate in South Asia remains low at 22% in 2020, compared to LAC (41%), EAP (43%), ECA (45%), and SSA (46%), and are likely to be concentrated in vulnerable sectors (Mukhtarova, 2020).

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