Previous Quarterly Editions
Expropriation Risk: 52 50 53 54 Political Violence Risk: 60 64 66 63 Terrorism Risk: 68 68 68 69 Exchange Transfer and Trade Sanction Risk: 48 48 50 48 Sovereign Default Risk: 56 56 57 56
TREND ► OUTLOOK ▲
At the end of May 2020, Prime Minister Narendra Modi announced the partial lifting of the hard lockdown that he had imposed in late March 2020. The lifting was partial because COVID-19 infections were still growing, but with the official number of cases having passed a million by mid-July 2020, it may have been too early. But Modi was under huge pressure as the economic effects of the lockdown were severe. This was partly because the economy was already slowing even before the pandemic, with GDP growth in fiscal 2019-20 (March-to-March) falling to 4.2%. But the poorly managed instigation of the lockdown, which was called at four hours’ notice and stranded millions of migrant workers, was followed by little government support to those affected. Limited by a weak banking system and rising debts, government ‘stimulus’ measures have amounted to just 1.1% of GDP, the lowest in Asia. As a result, the economy is likely to contract by 5% or more this year, with the central fiscal deficit rising close to 6% from 3.5% last year despite pre-COVD-19 attempts to rein in spending. Modi’s strategy is to gamble on a significant recovery in 2021-22, which looks quite likely. The government has been using the COVID-19 crisis to enact long-delayed market reforms, encourage foreign investment other than from China, and explicitly bid to enhance India’s role in global supply chains. However, with the collapse in domestic demand and the uncertain prospects for the global economy, the success of Modi’s gamble on success for 2021 is far from assured. A particular concern is that the banking system faces new strains even as it tries to recover from past problems. The country’s public sector banks will now feel the weight of moratoria on debt and interest repayments, and will experience increased default rates. 2019’s fall in non-performing asset ratios, down from 11.2% to 9.1%, will see a jarring reversal. Politically, the COVID-19 crisis eventually succeeded in taking precedence over the religious conflict that had built up in previous months around changes to India’s citizenship laws. Yet it may have opened up two other issues of significance. Relations between the federal government and several of the states whose governments are not controlled by Modi’s Bharatiya Janata Party (BJP) have deteriorated sharply, putting the entire federal system of government under pressure. Also, migrant labourers and the poor have suffered the most from the way that the central government has handled the crisis, this is likely to be reflected in the state assembly elections due in Bihar later this year (2020), as it is India’s poorest and most migrant-heavy state. However, Modi will benefit from infighting within the opposition Congress party, where the role of the Gandhi family is being questioned. The open fighting between Indian and Chinese soldiers at Galwan in Ladakh in mid-June 2020 has brought relations between Delhi and Beijing to a recent low. Delhi cannot afford war or even a limited clash but Hindu nationalists within the BJP make it difficult for him to back away. Delhi has already begun to impose sanctions on Chinese trade and investment with India although, paradoxically, the main effect may be to hurt India’s own hopes of a rapid economic recovery. While the fallout from the confrontation will remain diplomatic and economic, it will encourage India to tighten its links with the US-Japan-Australia axis that is attempting to contain China’s influence in Asia. Heightened tensions with China have also spilled over into a further deterioration in relations with Pakistan, Beijing’s regional ally, and smaller China-oriented neighbours such as Nepal.
TREND ▲ OUTLOOK ▲
While the Modi government has used the COVID-19 crisis to open new doors to foreign investment (in an effort to boost economic recovery), it is simultaneously imposing protectionist measures against China. While partly a response to the current state of bilateral relations, Delhi has made no secret of its ambition to make inroads into China’s share of global supply chains. Its anti-Beijing stance, which includes banning dozens of Chinese-based mobile apps, will encourage closer relations with Washington. Although the Modi government hopes for an end to India’s current exclusion from the US General System of Preferences, this seems unlikely given the emphasis on trade and immigration in President Trump’s re-election campaign. In a recent move, Trump suspended the issuance of H1-B immigrant work visas, of which Indians are the largest recipients in the world, and Washington has been angered by Delhi’s 2% digital tax which came into effect in April 2020 as part of an effort to promote domestic players in the digital space.
TREND ▼ OUTLOOK ▲
Protests and demonstrations have been effectively curtailed by COVID-19 restrictions on public assembly, but once these become possible again the focus is likely to be on two main issues. Trade unions and labour organisations are already planning action, mostly in urban centres, against the radical labour reforms pushed through by the federal government under cover of the crisis. At the same time, rural India may become the focus of deeply felt protests against economic neglect and the harsh treatment of migrant workers. More positively, unless the Hindu nationalist elements within the ruling BJP wish to stir them up again, the religious divisions seen in the early months of 2020 are not expected to recur during the second half of the year.
Resistance to the Modi government’s policies in Kashmir continues, with more than a hundred militants killed during the first half of 2020. The struggle is covertly supported by Pakistan, whose relations with India have now deteriorated to the point of intensified exchanges of fire along the Line-of-Control and large-scale diplomatic expulsions. Islamabad will take advantage of the heightened tension between Delhi and Beijing to try and enlist visible Chinese support for the ‘liberation’ of Kashmir. After the clash at Galwan, China may also consider re-invigorating some of the separatist movements in India’s north-east, along their shared border.
The central bank cut its interest rate from 5.5% to 4.4% in March 2020 and then again a couple of months later to 4.0% in May, the lowest level in a decade. The Indian rupee has been weathering the COVID-19 crisis relatively well in spite of further interest rate cuts. Other encouraging signs include foreign direct investment in 2019-20 rising by 18% and foreign reserves hitting a record high of 516 billion USD in July 2020.
Under strong pressure from the main rating agencies, Modi has pursued a parsimonious 'stimulus' strategy which puts as little pressure as possible on the public debt-to-GDP ratio even though the economy faces a 5% contraction. He has cause to worry as some projections show the debt-to-GDP ratio reaching 84% at the end of fiscal 2020-21 from 68% at the start of the previous year. His aim is to preserve India's access to significant foreign investment funds that are unavailable to non-investment grade economies. However, the price has been severe short-term economic damage, which may leave scars and inhibit recovery.
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