2019 for South Asia has been one of the most eventful years in the past decade. 2019 witnessed the first trans-line of control air attacks between India and Pakistan after almost five decades, and one of the worst terrorist attacks in about a decade in Sri Lanka on Easter Sunday. Jamaat-ul Mujahideen Bangladesh is hailed by experts as one of the most advanced, criminal minded and crafty terrorist organization in the sub-continent. The Taliban revived itself as a major player in Afghanistan for the first time since their removal from power in 2001. On the political front, India saw major political and constitutional reforms, while Sri Lanka and Maldives have seen new governments. Pakistan continues to grapple with uniformed democracy in new ways. Nepal’s growing closeness with China, seen alongside China’s increasing role in Sri Lanka and Pakistan too has India worried.
On the economic front, South Asia too saw a big flux in 2019. While the economy of Pakistan has come to a historical low, India and Nepal have revived their economies ten years after the global economic crisis to become some of the fastest growing economies. Bangladesh continues to remain one of the fastest growing economies in the region with its GDP growth rate forecast at 8% in 2020. South Asia remains the region with one of the highest growth rates, and one of the largest markets with youngest work force.
Against this backdrop of geopolitical and economic challenges coupled with massive opportunities in market growth and capitalization focus, it becomes important to carefully evaluate the risks of doing business in South Asia. MitKat’s South Asia Risk Review 2020 brings to you an indepth geo-political analysis of the major issues affecting each country in the region, the influence of external powers in domestic markets and political space, as well as a forecast for the coming year based on trend development and analysis.
Lt Gen Sudhir Sharma
PVSM, AVSM, YSM, VSM (Retd), Chairman
“Geopolitical and geo-economic turbulence, endemic in the South Asian region, continued in 2019 and is likely to manifest in the similar vein in 2020. Certain important events of this year are likely to cast their shadow on the strategic dynamics, and the inherent fissures and fault lines in the ensuing year will exacerbate further. The 2019 parliamentary elections in India though offered continuity on one hand, on the other however, the loud and vitriolic campaign polarised the fractured polity even more. The election of Mr Modi and the revocation of Article 370 in Kashmir and realignment of state boundaries evoked a shrill response from Pakistan and some other nations. Earlier India had raised the stakes in a high gamble air strike on terror targets in Balakot, Pakistan in Feb 2019; and changed forever the status quo of the fragile LoC between the two countries. The China-Pakistan nexus got further strengthened, and this axis is likely to dominate the geopolitical discourse of the region. The tentative ‘quad’ grouping to counterbalance China and the BRI would further strain the insecurities of the dominant players.”
NEW RISKS FOR A NEW DECADE
As we enter a new decade, the world at large finds itself at a societal, economic and environmental tipping point. Growth in manufacturing economies is slowing down, economic inequalities are on the rise, and climate change is taking place at a faster pace than before. Simultaneously we also see an increase in radicalized movements, particularly against immigrants and minorities. There is also a growing disbelief in the capitalist system, and a backlash against the pace of technological developments and dwindling number of elites that control an even larger share of the global market. These trends get mirrored in South Asia.
These geo-political and geo-economic trends put governments in South Asia in a bind, with increasing pressure to find new ways to deal with the new risks as they are emerging, or risk losing business with the companies holding back investments and changing supply chains to avoid certain countries.
We therefore see five persistent risks for 2020 in South Asia:
Civil disturbance/ activism
Protests, riots, and violent activism across the countries are expected to pose one of the most important risks to business continuity in South Asia. As civil dissonance grows, and avenues for protest under the democratic system increase, civil disturbances can be expected to remain one of the most persistent risks for 2020.
Terrorism and extremism
Each country of the region faces persistent threats from increasing radicalized groups and individuals, many of whom join various terrorist and extremist groups spread across South Asia. Disruptions to business operations from terrorist threats would continue to remain high in 2020.
Technology
Technological risks would encompass the constant new innovations that outpace each other, rendering slow adoption of any technology into business – a more futile and expensive exercise. The integration of new and emerging technologies such as artificial intelligence, machine learning and big data development and management, if not managed properly would expose businesses to various compliance and financial risks.
Economic flux
Geo-economics, and in particular the effect of shifting political strategy towards short-term economic goals would see multiple countries in South Asia facing an economic flux. This can be expected to manifest in the form of shifting economic policies, vulnerabilities in market transactions, and changes in repo rate and currency rates based on political decisions.
Environmental risk
Fast-paced climate change with resultant extreme weather phenomenon, as well as shifting environmental regulations imposed by governments due to political pressure from activists, international platforms, as well as genuine concerns can lead to business disruptions.
INTERCONNECTED, INTERDEPENDENT , & YET UNDER EXTERNAL INFLUENCE
As we move ahead with the high levels of globalization achieved in the past two decades, it is unlikely that South Asia would be able to focus on these risks without any influence from the larger global trends – or that it even should. While acknowledging the influence that all countries and international developments have on governance, politics and economy of a country, or a subcontinent, South Asia is more influenced by the trends and power overshadow of two of the three major power centers of the world – United States and China.
As the stature of India continues to grow internationally as a stand-alone power, Pakistan, Afghanistan and Nepal are being brought closer into the ambit of China through its Belt and Road Initiative (BRI). Sri Lanka will try to make an independent stand due to its location in the Indo-pacific region, so global powers can be expected to lessen their hold, while maintaining a high level of influence.
Social cohesiveness, economic stability and environmental sustainability will become more important centers of focus for both political and economic health of the countries in the sub-continent. These new aspects, along with more traditional threats of terrorism and cross-border proxy wars that affect all countries of the region, may be enhanced. Developments in technology such as big data, 5G telecom systems, artificial intelligence, cyber centrality, and the all powerful tool of social media, (which allows a platform for people to be radicalized, plan and conduct attacks, and spread rumours about economic/ social issues) would continue to disrupt perceptions in the region.
AFGHANISTAN
2020 for Afghanistan promises to be a big year. After the new President was announced in November 2019, US, Russia and China would try at various levels to commence negotiations with the Taliban. ISIS-Khorasan has started to develop new relationships for information sharing and operations outsourcing with local militants. Uneasiness between the various partners in the government will remain, as will the country’s bargaining position with the major powers of the world. It is possible that the situation and political leadership levels may change post the annual summer offensive by the Taliban (yet to be announced).
BANGLADESH
Volatility is expected to prevail in Bangladesh as the ongoing discussions on the expatriation process of the Rohingya refugees have been prolonged by the Bangladesh and Myanmar governments. The demands for wage increments are likely to drive industrial unrest in Bangladesh garment manufacturing sector. Other triggers for violent protests include various student demands. Noticeably, there has been a shift in the demands by the students from political issues to fighting for a better road and transport system. Having said that, Bangladesh’s economy is forecast to continue to expand in 2019 and 2020 fiscal years with stronger performance by internal and external sectors.
BHUTAN
For Bhutan, agriculture, hydropower, inland waterways, jobs, urbanisation, and international relations are some of the most sensitive and important issues in the region in near future. Economic relations between India and Bhutan, among other things, are based on harvesting Bhutan’s potential to generate hydropower for both external trade and domestic use. In the near future, economic growth in Bhutan is forecast to strengthen moderately, supported by the industry and services sectors. However, strengthening domestic resources toward better funding of development remains a challenge.
MYANMAR
In late 2020, Myanmar will hold general elections. The run up till elections could witness increase of violence perpetrated by ethnically driven insurgents i.e., high risk of conflicts and clashes, intensification of Rohingya crisis, to name a few. Chances of ideological conflict between military and current government cannot be ruled out. Ethnic insurgencies, Rohingya crisis, illegal minning, drug trade and a regime change will continue to affect the country’s security dynamics.
PAKISTAN
2020 may prove to be one of the more unstable years for Pakistan. While politically the country seems more stable than ever, but with the Army Chief reinstated, in sync with the civilian government of Imran Khan (who wields control over Tehrik-e-Taliban Pakistan) and order restored within the ISI, there are now more external destabilizing elements than ever. It is possible that the economic crisis may trigger the need for the Pakistani Army to correct the course of the economy and domestic politics. The army may simply extend its control over the civilian government, in an attempt that this would help them get more funds and bailouts.
NEPAL
The year 2020 may witness further increase of proximity between Nepal and China. 2020 also looks like a good year for Nepal and India to strengthen their ties with the oil pipeline coming into picture. The 69km pipeline will transport fuel from the Barauni refinery in Bihar to Amlekhgunj in South-East Nepal and is the first cross-border petroleum product pipeline in South Asia. This shared interest could further lead to a competition between China and India in the region. GDP growth is projected to an average of 6.4% over the medium term. In terms of natural hazards and calamities, Nepal is susceptible to earthquakes and floods, changing monsoon patterns, and the region needs to prepare for more weather extremities such as severe drought and intense rainfall in 2020.
THE MALDIVES
With the return of political stability in 2019, the year of 2020 poses to be a promising one for Maldives both economically and politically as multiple reforms and joint projects are anticipated to be implemented. A slew of measures are expected to be implemented by President Solih which aims at increasing the country’s tourism in 2020. India-Maldives ties are projected to solidify with increased cooperation between the two countries.
SRI LANKA
With Gotabaya Rajapaksha winning the presidential elections, we can expect the new government to look to convert the country’s geostrategic position into an economic advantage, without compromising the nation’s territorial integrity; trying to balance the influence of China, India and the United States. China is likely to increase its economic assistance to Sri Lanka under its Belt-and-Road Initiative to protect its multibillion dollar investments and its strategic foothold. Growth is estimated to accelerate next year, buoyed by an expected recovery of tourist numbers. Moreover, the IMF program should support business sentiment and fixed investment. Global trade tensions and a large fiscal deficit, however, pose downside risks. Climate variability and sea level rise could bring inclement weather conditions to the country such as heavy rainfall and floods over time.
INDIA
For India, 2020 is expected to be a year wherein further reforms and implementation can be expected by the government. Instances of civil disturbance are likely to subside with support for the main opposition visibly reducing. Strengthening of bi-lateral ties with other nations can be expected, while India-Pakistan relationship will continue witnessing its complexities. The impact of climate change is evident and government machineries will have to be active to ensure minimal impact due to natural calamities.
OUTLOOK 2020
India has added over 1,100 start-ups in 2019 and continues to be the 3rd largest start-up ecosystem in the world. Moreover, Indian start-up ecosystem is geared up for 10x growth trajectory by 2025. 2020 is expected to be a year wherein further reforms and implementation can be expected by the government.
Instances of civil disturbance are likely to subside with support for the main opposition visibly reducing. India has the 2020 budget to look forward to since the National Democratic Alliance has a majority and they are bound to come up with changes. Economically experts predict upward GDP growth in the latter part of 2020. Strengthening of bi-lateral ties with other nations can be expected, while India-Pakistan relationship will continue witnessing its complexities. The impact of climate change is evident and government machineries will have to be active to ensure minimal impact due to natural calamities.
