Index trend
Previous quarterly editions
Expropriation risk: 54 54 54 54 ► Political violence risk:57 57 57 57 ►Terrorism risk:71 71 74 74 ▲Exchange transfer and trade sanction risk: 44 44 44 35 ▼Sovereign default risk:47 47 47 47 ►
Overall Risk Temperature: 58 (Significant 1) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
3
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
As instances of terrorist violence in the border regions of Jammu and Kashmir increase, India has repeatedly identified this as the result of a form of “gray zone” aggression. The Indian government argues that Pakistan, with tacit or other support from China, is fomenting such terrorism as a form of proxy war through multiple means: first, infiltration from across the border of trained terrorists familiar with the terrain and managed by Pakistani handlers; second, ideological targeting and clandestine financing of disgruntled local citizens, especially youth, to transform them into militants opposing the Indian state; and third, distribution of propaganda material to create an environment where separatist ideas can gain roots. While the extent of this “gray zone aggression” may be exaggerated, there is truth in these claims, and such activities have contributed to the persistence and even worsening of violence in the former state.
Delhi itself pursues a form of “gray zone aggression” vis-à-vis China, through the promotion (despite claims of neutrality) of the activities of the Dalai Lama and Tibetan government in exile, which is based in India and is allowed to operate from there.
That is not all. Given its size relative to neighbors such as Nepal, Bangladesh, the Maldives and Sri Lanka, and its strategic standoff with China vis-à-vis these states, India extends its gray zone aggression to these countries. Measures include attempts to influence domestic politics by fostering and supporting “pro-India” elements, including sections wooed on religious, ethnic or linguistic grounds. This has become an issue in Bangladesh, following the violent exit of the Sheikh Hasina government because of mass protests against authoritarianism and deteriorating economic conditions. While explained as being driven by strategic or even purely altruistic motives, these forms of gray zone aggression are a means of gaining a degree of control over neighboring small states to use them as buffers against larger “enemies,” especially China.
TREND ►As of now there is no significant risk of expropriation through nationalization in India. There is broad multi-partisan support for a policy framework providing for an important role for foreign investments in driving economic development. Differences revolve around what and how much needs to be done to mitigate the rising inequality associated with growth along that trajectory. The most stringent of recommended redistributive measures are those that call for a tax on wealth, inheritance and/or “super-sized” incomes.
There are concerns on the profitability front, arising from the current government’s proclivity to favor a few business groups, which may take the form of restricting foreign investors’ activity. Thus, in a surprising recent move, Union Commerce Minister Piyush Goyal publicly declared that large foreign e-commerce platforms such as Amazon were resorting to a range of illegal and predatory practices to increase market share and monopolize markets. In violation of foreign direct investment law, he argued, these firms are setting up dummy Indian vendors to do the job of selling products for them, and the algorithm on the platform drives them to these favored vendors. There is suspicion that this attack, made ostensibly in defense of the interests of small traders, was actually driven by the interests of domestic big business such as Reliance and Adani, even though the minister soon partly retracted with a clarification that the government wants to encourage foreign investors, so long as they are “fair” and “honest.”
TREND ►
Terrorist attacks in Jammu and Kashmir, and violent ethnic conflict with sophisticated arms in the northeast, especially Manipur state, where even paramilitary and military forces have not been able to restore normalcy, have captured national attention despite being in the extremities of a geographically large nation.
Combined with intensified run-ins with leftist extremist forces in eastern parts of the country (with 153 Maoists killed this year so far, compared with 46 in 2021, 30 in 2022 and 29 in 2023), these developments have kept political violence in the headlines. Though insignificant given the dimensions of the nation as a whole, they are enough to disrupt business in crucial areas.
The problem of political violence does not end with these incipient forms of civil war. Simmering below day-to-day democratic politics, and often boiling over, are political conflicts resulting from two now-dominant trends in Indian politics. The first is the desire for the ruling Bharatiya Janata Party (BJP) — reduced in the last elections from an absolute majority to being only the principal component of a ruling coalition — to destroy the opposition through any means and monopolize the political space. The second is the use by the BJP of a divisive, majoritarian, communal Hindu agenda, which allows sundry subordinate organizations to indulge in violence and resort to vigilantism aimed primarily at Muslims. The changed political correlation, with a vocal opposition led by a rejuvenated Congress Party, and the desperation in the BJP to regain lost ground and improve performance in a spate of state assembly elections, has intensified these conflicts, threatening violence of a kind that can be socially disruptive and economically costly.
Meanwhile, protests by farmers, informal workers and above all unemployed youth literally falling over each other in the hundreds of thousands to occupy a few thousand job vacancies, creates a wholly different climate of unrest. The Supreme Court has had to intervene to plead with protesting peasant organizations to withdraw roadblocks affecting the day-to-day lives of citizens. The sanguine picture of India’s social and economic health derived from reading GDP growth rates is not warranted by other evidence from the ground.
TREND ▲
When there are multiple conflicts that take violent forms, and in a deeply hierarchical society there are badly hurt victims in each, the potential for a violent backlash, often from a leaderless mass, increases. India, therefore, remains a potential hotbed for both extreme left- and right-wing terrorism. It does not help that the state — whether in Kashmir, left-wing terrorism-infested Chhattisgarh, the Northeast of the country or elsewhere — has tended to respond with a strong and trigger-happy hand. As Kashmir painfully demonstrates, that may not be a solution and can become part of the problem.
TREND ▼Buoyant remittance flows and earnings from software and IT-enabled services have kept India’s current account deficit under control, despite disappointing merchandise export performance and periodic surges in gold imports fueled by demand from a gold-obsessed population. That has meant that the rupee, while depreciating, has performed better than many other currencies in low- and middle-income countries. That has whetted further the appetite for India’s equity and bonds, leading to large portfolio inflows. In the circumstances, trade sanctions are unlikely, other than with respect to Pakistan or China.
However, the strong rupee is also a source of weakness. It has incentivized portfolio investment inflows, leading to a large presence of legacy volumes of footloose foreign capital, which can leave without notice. The inflows have also fueled a speculative boom in financial markets that must unwind. When that begins, foreign reserves, which reflect liabilities rather than earnings, can be quickly run down and the rupee can dive. At that time restrictions on transfer-based payments may be unavoidable, signaling a small risk.
Given current foreign reserves and the fact that India’s aggregate sovereign debt is weighted heavily in favor of domestic currency debt, the risk of sovereign default is extremely low or negligible.
