Index Trend Previous Quarterly Editions
Expropriation Risk: 53 Political Violence Risk: 66 Terrorism Risk: 68 Exchange Transfer and Trade Sanction Risk: 50 Sovereign Default Risk: 57
Risk Temperature 61 (Medium-High) +1
TREND ▲ ▲
In late March 2020, Prime Minister Narendra Modi announced a nationwide lockdown, telling the country that there was no other way to prevent the spread of COVID-19. Modi is fully aware of the consequences of the move, particularly on the many workers whose jobs are in the informal economy. His finance minister unveiled an accompanying package of economic support that includes cash transfers and free food for those who earn their living from day to day and for whom the lockdown means no income. The cost of the government’s initial rescue package, put at around 25 billion USD, will push the fiscal deficit up substantially from the expected 3.5% for the current fiscal year, and by the end of March 2020 the overall emergency looked likely to cut growth by more than half. The virus crisis has caught the economy at a particularly weak moment. GDP growth has declined steadily for the last seven quarters from a high of 7.2% in 2017-18. This partly reflects the continuing problems with non-performing assets (NPA), with the private sector YES Bank becoming the latest to need bailing out in March 2020, but it is also the result of constraints on consumption that five successive cuts in interest rates have not been able to overcome. Against this background, March 2020 was particularly bad, with record falls on the Bombay stock market, record withdrawals by foreign portfolio investors that totalled 15 billion USD in the first three weeks of March 2020, and a swift fall in the rupee to below 75 to the dollar (USD). That said, there are some positive aspects as the government confronts the virus emergency. March 2020 saw foreign exchange reserves at a record high while the price of oil, by far the largest category of India’s imports, collapsed on the failure of leading producers to agree on production levels. Moreover, the health crisis may also help to defuse tensions around the Citizenship (Amendment) Act (CAA), which has quickly become a serious problem for the country. Efforts by the Hindu nationalist Bharatiya Janata Party (BJP), which controls the federal government, to push through an amendment to the country’s Citizenship Act has provoked widespread protest and strained relations inside the federal system. The discriminatory aspects of the CAA have led several state governments that are not controlled by the BJP to threaten to defy constitutional convention on the relationship between federal and state governments. Under the Epidemic Diseases Act (1897), which he has now invoked, Modi has been able to rally support from the state governments to follow his lead in the health crisis, which they are happy to do in the context of coordinating lockdown procedures and other measures against COVID-19. The crisis should give him cover to shelve the CAA, reducing the trigger for intercommunal violence and restoring relations between the different tiers of government. There is a risk that the BJP may attempt to use the emergency situation to push for the more centralised form of government that some in the party have often advocated. At present, however, it appears more likely that he sees it as an occasion to rebuild public consensus, which includes reining in the more radical wing of the BJP. He has already begun to do this in Kashmir where restrictions on civil society are beginning to ease and discussions starting on restoration of due constitutional process. Diplomatic pressure may also encourage Modi towards compromise given the strong reaction against the CAA in Bangladesh, where the pro-Indian government in Dhaka has been heavily embarrassed by its anti-Muslim tone.
Expropriation Risk 53 (Significant) TREND ▲ ▲
India’s drift towards protectionism continued when the budget for fiscal 2020-21 introduced a new set of tariffs. Trade talks with the US have made little progress, even after President Trump’s visit to Delhi in February 2020, and there is no sign that the Modi government will reconsider its refusal to sign the pan-Asian Regional Comprehensive Economic Partnership (RCEP). At the same time, Modi remains eager to attract foreign direct investment, especially into infrastructure and manufacturing. However, he has not been helped by the recent refusal of the Supreme Court to accept an agreement that the government brokered with telecoms giant Vodafone to spread out its payment of past dues. Faced also with another unresolved tax dispute, Vodafone’s willingness to continue operating in India is in the balance and its departure would offer a discouraging lesson to other foreign investors.
India’s drift towards protectionism continued when
Political Violence Risk 66 ( Medium-High) TREND ▲ ▲
The violent protests by Muslim communities against the CAA started in Uttar Pradesh in January 2020, when more than a thousand demonstrators were arrested, and reached a high point in the Delhi riots of late February 2020, which left more than 50 people dead. Before the virus struck, the government was preparing to press ahead with labour reform, a move which the unions were preparing to resist through strikes and on the streets as well as in court. The virus will also put this on hold and the labour market may look different to both sides in the light of the recovery period, although the heavy-handed tactics used by the police to enforce lockdown restrictions will be remembered.
Terrorism Risk 68 (Medium-High) TREND ► ▲
The abrogation of Kashmir’s special status and the BJP’s subsequent use of the CAA to threaten the citizenship status of many Muslims has been widely seen by the Muslim community, both in India and across South Asia more generally, as aggressively discriminatory. Domestically, the moves are likely to spur resistance to the resurgent Hindu nationalism of the BJP-led Indian government, while abroad Pakistan has made plain its support for those looking to defy the BJP. While the virus has reduced the prospect of cross-border incidents between India and Pakistan, tension is likely to resume as soon as the health emergency is under control.
Exchange Transfer and Trade Sanctions Risk 50 (Medium) TREND ▲ ▲
As with other currencies, the COVID-19 crisis quickly put pressure on the rupee. The Reserve Bank of India, the country’s central bank, is fully aware of the challenge. Having cut its benchmark rate by 75 basis points and moved to increase liquidity at the end of March 2020, in early April 2020 it made clear that it expects forecasts made as recently as February 2020 of growth reaching 5% this year to be replaced by recession.
Sovereign Default Risk 57 (Significant) TREND ▲ ▲
Going into the crisis, India’s ratio of public debt to GDP was 68%, which is not high in relative terms, and 90% of that debt is denominated in rupees which limits the impact of a sliding currency. Foreign exchange reserves began in March 2020 at a record of 480 billion USD, offering the equivalent of 17 months’ import cover and providing the government with a cushion as it ramps up public spending to respond to the virus.
