The region's growth will climb up from historic lows in 2020 and will be on a path to recovery in the next two years, it said.
But growth is uneven and economic activity well below pre-Covid-19 estimates, according to the latest report 'South Asia Economic Focus South Asia Vaccinates'.
"We are encouraged to see clear signs of an economic rebound in South Asia, but the pandemic is not yet under control and the recovery remains fragile, calling for vigilance," said Hartwig Schafer, World Bank's vice president for South Asia.
"Going forward, South Asian countries need to ramp up their vaccination programmes and invest their scarce resources wisely to set a foundation for a more inclusive and resilient future."
Many businesses need to make up for lost revenue and millions of workers, most of them in the informal sector, still reel from job losses, falling incomes, worsening inequalities, and human capital deficits, the global lender said.
The report showed that the region is set to regain its historical growth rate by 2022.
Electricity consumption and mobility data is a clear indication of recovering economic activity.
India, which comprises the bulk of the region's economy, is expected to grow more than 10 per cent in the fiscal year 2021-22—a substantial upward revision of 4.7 percentage points from January 2021 forecasts.
The outlook for Bangladesh, Nepal, and Pakistan has also been revised upward, supported by better than expected remittance inflows.
Bangladesh's gross domestic product (GDP) is expected to increase by 3.6 per cent in 2021, Nepal's GDP is projected to grow by 2.7 per cent in the fiscal year 2021-22 and recover to 5.1 per cent by 2023, Pakistan's growth is expected to reach 1.3 per cent in 2021, slightly above previous projections.
The improved economic outlook reflects South Asian countries' efforts to keep their Covid-19 caseload under control and swiftly roll out vaccine campaigns.
Governments' decisions to transition from widespread lockdowns to more targeted interventions, accommodating monetary policies and fiscal stimuli—through targeted cash transfers and employment compensation programmes—have also propped up recovery, the report notes.
While laying bare South Asia's deep-seated inequalities and vulnerabilities, the pandemic provides an opportunity to chart a path toward a more equitable and robust recovery.
To that end, the report recommended that governments develop universal social insurance to protect informal workers, increase regional cooperation and lift customs restrictions on key staples to prevent sudden spikes in food prices.
South Asia, which grapples with high stunting rates among children and accounts for more than half of the world's student dropouts due to Covid-19, needs to ramp up investments in human capital to help new generations grow up healthy and become productive workers.
Noting that South Asia's public spending on healthcare is the lowest in the world, the report also suggested that countries further invest in preventive care, finance health research, and scale up their health infrastructure, including for mass and quick production of vaccines.
"The health and economic benefits from vaccinations greatly exceed the costs involved in purchasing and distributing vaccines for all South Asian countries," said Hans Timmer, World Bank's chief economist for South Asia.
"South Asia has stepped up to vaccinate its people, but its healthcare capacity is limited as the region only spends 2 per cent of its GDP on healthcare, lagging any other region. The main challenge ahead is to reprioritise limited resources and mobilise more revenue to reach the entire population and achieve full recovery."
The World Bank, one of the largest sources of funding and knowledge for developing countries, is taking broad, fast action to help developing countries respond to the health, social and economic impacts of coronavirus.
This includes $12 billion to help low- and middle-income countries purchase and distribute Covid-19 vaccines, tests, and treatments, and strengthen vaccination systems.
The financing builds on the broader World Bank Group Covid-19 response, which is helping more than 100 countries strengthen health systems, support the poorest households, and create supportive conditions to maintain livelihoods and jobs for those hit hardest.