Previous Quarterly Editions
Expropriation Risk: 52 53 54 52 Political Violence Risk: 57 60 62 60 Terrorism Risk: 64 63 65 68 Exchange Transfer and Trade Sanction Risk: 46 47 50 48 Sovereign Default Risk: 53 54 55 56
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The economic data that the government held back until after the general election finished in May have revealed a much less promising picture of the economy than previously supposed. GDP growth in the last quarter of fiscal 2018-19, which ended in March, fell to 5.8%, bringing the annual rate down to 6.8% from earlier projections of 7.2%. Forecasts for 2019-20 have now been trimmed to 6.6-6.9%. The unemployment rate of 7.9% in May also represented a 45-year high. The convenient delays in data publication have further reduced confidence in India’s statistical regime at a time when concerns over the independence of the Reserve Bank of India (RBI) are deepening. Revelation of the slowdown has also hit Indian stock markets, swollen on anticipation of prime minister Narendra Modi’s election victory, and the Bombay Sensex fell by 6% in July alone. While the long-term investment squeeze related to high ratios of non-performing assets (NPA) in the banking sector now appears to be easing, consumption has suffered a sharp downturn. Since the public sector Infrastructure Leasing and Financial Services Limited (IL&FS) defaulted on its debts in September 2018, credit has become very tight in non-banking financial institutions (NBFI). These NBFI largely finance domestic consumption and, in the wake of the squeeze, demand for autos alone has fallen by 20%. In response, the RBI has now initiated a programme to tackle NBFI debt alongside that of the banks. The first budget from the post-election government contained measures to re-stimulate industrial growth through increased FDI and supply-side reform, especially in labour markets. In addition, the RBI’s Monetary Policy Committee has continued to cut interest rates. Nonetheless, subdued growth in 2019-20 may help India to maintain its external balances as imports fall. In politics, the scale of Modi’s general election victory surprised observers and has given his Bharatiya Janata Party (BJP) a dominant national position even beyond its single-party majority in the Lok Sabha. Non-BJP parties in the regional states are feeling the effect, and the country is experiencing a degree of one-party dominance not seen since the heyday of the Indian National Congress party in the 1950s. While this may bring greater coherence to governance, it also risks an increasing authoritarianism. The BJP’s clampdown on media freedoms and the rising violence against members of cultural minorities are now stirring the Supreme Court into defensive action. The situation in Jammu and Kashmir (J&K), India’s only Muslim majority state, has quickly become a post-election cause for concern. In July, claiming that it was forestalling a major terrorist threat, Modi’s Hindu nationalist government suspended the state’s legislature, leant heavily on dissident groups, and increased the presence of the military. The following month, in a move that proved very popular in much of India, Delhi revoked J&K’s special constitutional status and passed legislation to reorganise the state's governance. This was seen in some quarters as a precursor to breaking up J&K, although such a strategy would be likely to re-ignite the Kashmir ‘liberation’ struggle of the 1990s and push tensions with Pakistan to a dangerous level. However, Delhi fears that, as Islamabad is increasingly seen as playing a central role in enabling a smooth US withdrawal from Afghanistan, its own relationship with Washington will weaken, with the consequence that Islamabad will gain greater leverage over Kashmir.
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The impact of President Trump’s trade policies remains a major source of concern but India’s large trade surplus with the US makes it reluctant to risk a major confrontation with Washington, even though it has been hit hard by losing the ability to import oil from Iran. In response, Delhi has chosen to impose largely symbolic reciprocal tariffs on a small range of US imports while making it clear that sanctions imposed for its purchase of weaponry from Russia, specifically the S-400 air defence system that is due to arrive next year, would cross a red line.
After rising ahead of the elections, the main risk of political violence now comes from the triumphalism of Hindu nationalists following the BJP’s sweeping general election victory. The Supreme Court has ordered ten regional states to sharpen their protocols against lynching after a spate of attacks on cultural minorities, especially Muslims and Dalits. Protests are likely to continue from unions, which are concerned that Modi’s proposals for creating new jobs by ending restrictive practices and introducing more short-term contracts will mean a reduction in rights and wages for their members. The proposal for the country’s first national minimum wage, which is being introduced at a rate below that recommended by an advisory committee, has become a particular target.
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The government has strengthened its military position in Kashmir following its claim that terrorist attacks from Pakistan-based militant groups are imminent. Whether or not this is the case, heavier state coercion in Kashmir risks provoking violent responses from sympathetic groups both inside the state and across the wider Muslim community in other Indian regions, as happened during the insurrection of the 1990s.
The economic slowdown is easing the external problems of the Indian economy as the current account deficit begins to fall. Heavy foreign portfolio purchasing in the weeks leading up to the May general election also helped the Indian rupee to strengthen against the US dollar, although this was followed by a sharp selloff. The new budget makes a significant move to open opportunities for foreign investment in Indian debt. While promising stronger foreign currency inflows, this would also further increase the risks of volatility in forex positions and exchange values.
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The government's full-year budget for 2019-20, unveiled in July, places strong emphasis on reviving industry, but mainly through encouraging foreign investors because its own ability to provide stimulus measures is limited. Public spending is already straining prudential norms. A headline central deficit of 3.4% of GDP for 2018-19 masks a total deficit, including the deficits of state governments and public sector industries, that is closer to 9%. NPA problems in the public sector banks remain serious and may not fall below 12.6% of loans before the end of next year.
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