Subdued manufacturing activity and a sharp slowing of investment growth in India led to GDP growth in South Asia as a whole slowing to an estimated 4.7 percent in market price terms in calendar year 2013, the Bank said in a new report Wednesday.
The growth in South Asia was 2.6 percentage points below average growth in 2003-12, the World Bank noted in its twice-yearly Global Economic Prospects report that also lowered projections for global economic outlook.
Firming global growth and a modest pickup in industrial activity should help lift South Asia's growth to 5.3 percent in 2014, rising to 5.9 percent in 2015 and 6.3 percent in 2016, it said
Most of the acceleration is localised in India, supported by a gradual pickup of domestic investment and rising global demand.
The World Bank, however, cautioned that forecasts assume that reforms are undertaken to ease supply-side constraints (particularly in energy and infrastructure) and to improve labour productivity, fiscal consolidation continues, and a credible monetary policy stance is maintained.
"The financial health of economies has improved. With the exception of China and Russia, stock markets have done well in emerging economies, notably, India and Indonesia," said Kaushik Basu, Senior Vice President and Chief Economist at the World Bank.
"But we are not totally out of the woods yet," he said. "A gradual tightening of fiscal policy and structural reforms are desirable to restore fiscal space depleted by the 2008 financial crisis."
"In brief, now is the time to prepare for the next crisis," Basu said.
Developing countries are headed for a year of disappointing growth, as first quarter weakness in 2014 has delayed an expected pick-up in economic activity, the Bank said.
The Bank has lowered its forecasts for developing countries to 4.8 percent this year, down from its January estimate of 5.3 percent.
Signs point to strengthening in 2015 and 2016 to 5.4 and 5.5 percent, respectively.
China is expected to grow by 7.6 percent this year, but this will depend on the success of rebalancing efforts, the GEP said.
Bad weather in the US, the crisis in Ukraine, rebalancing in China, political strife in several middle-income economies, slow progress on structural reform, and capacity constraints are all contributing to a third straight year of sub 5 percent growth for the developing countries as a whole, it said.
Fiscal policy needs to tighten in countries where deficits remain large, including Ghana, India, Kenya, Malaysia, and South Africa, the Bank said.
In addition, the structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated in order to sustain rapid income growth.
The global economy is expected to pick up speed as the year progresses and is projected to expand by 2.8 percent this year, strengthening to 3.4 and 3.5 percent in 2015 and 2016, respectively.
High-income economies will contribute about half of global growth in 2015 and 2016, compared with less than 40 percent in 2013, providing an important impetus for developing countries, the Bank said.