Thursday, April 7 2005 10:34 Hrs (IST) - World Time -

Washington: With India's GDP growth still at a healthy 6.9 per cent, the South Asian region is expected to continue with its balanced growth aided by the largest contributions from domestic consumption and investment, the World Bank has said.

South Asia's GDP is estimated to have grown a robust 6.6 percent in 2004, according to World Bank's annual Global Development Finance 2005 report.

"While this is down from the 7.8 percent growth posted in 2003, the deceleration mainly reflects a poor crop in India," says Shanta Devarajan, the World Bank's Chief Economist for the South Asia Region.

"India's growth rate this year is lower than last year but still a healthy 6.9 per cent. Outside India, regional growth increased from 5.7 per cent in 2003 to 5.9 per cent in 2004. The more balanced growth that characterised the region in 2004 is expected to continue with domestic consumption and investment providing the largest contributions to growth."

The report also says Global economic growth reached 3.8 per cent in 2004-the fastest rate in four years. Developing countries outgrew high-income countries, and the gains were widespread- all developing regions grew faster in 2004 than their average over the last decade.

But global growth momentum has peaked, and developing country gains are vulnerable to risks associated with adjustments to ballooning global imbalances-especially the $ 666-billion current account deficit, it says.

According to the report, the strong global performance was underpinned by solid US growth and rapid expansion in China, India and Russia.

"Record expansion of 6.6 per cent in developing countries was encouraged by favourable global conditions and supported by years of domestic policy improvements. As a result, financial flows to developing countries during 2004 reached levels not seen since the onset of the financial crises of the late 1990s," it says.

Net private capital flows, including debt and equity to developing countries, increased by $ 51 billion to $ 301.3 billion in 2004.

Of this, net foreign direct investment (FDI) totalled $ 165.5 billion, up by $ 13.7 billion in 2004. In South Asia, net private capital flows increased from $ 11.2 billion in 2003 to a record $ 16.8 billion in 2004.

FDI rose modestly from $5.2 billion in 2003 to $ 6.5 billion in 2004.

FDI outflows from developing countries rose to an estimated $ 40 billion in 2004, up from $ 16 billion in 2002; these outflows are coming, for the most part, from the same countries receiving the bulk of private capital inflows, namely Brazil, China, Mexico and Russia.

The external debt burden in South Asia has declined substantially over the past few years, falling from 29 percent of GDP in 1998 to 22 percent in 2004, the report shows. Despite that, there is a risk that public debt burdens could increase significantly given the sizeable fiscal imbalances in some countries.

Central Governments in the region as a whole recorded a budget deficit equal to 8.3 per cent of GDP in 2004, up from 7.9 per cent in 2003.

Devarajan noted that workers' remittances sent to the region increased significantly in 2004, from $ 26.8 billion in 2003 to $ 32.7 billion, an amount that greatly exceeds the $ 22.7 billion in total flows-private and official-to the region.

"The large increase in 2004 stems from remittances sent to India, which surged from $ 17.4 billion in 2003 to $ 23.0 billion in 2004. The region as a whole receives 26 per cent of remittances to all developing countries," Devarajan added.

The GDF 2005 forecasts that global growth will slow down to 3.1 per cent in 2005, as a result of increases in US interest rates, fiscal tightening, and the effects of the 25-percent real effective appreciation of the Euro.

A reduction in demand for developing-country exports is expected to slow growth among them to 5.7 per cent in 2005, which still remains above recent growth trends.

This comparatively buoyant growth among developing countries is led by East Asia, South Asia, and Eastern Europe and Central Asia, where regional GDP grew respectively by 8.3, 6.6 and 6.8 per cent in 2004.