Previous Quarterly Editions
Expropriation Risk: 46 46 46 52 Political Violence Risk: 51 51 51 57 Terrorism Risk: 68 68 69 69 Exchange Transfer and Trade Sanction Risk: 35 35 35 35 Sovereign Default Risk: 57 57 57 57
TREND ▲
As 2021 has progressed, India has been seized by a new wave of COVID-19 infections, with the number of cases and deaths rising at an alarming rate. While the spike began in Maharashtra, and within it, India’s commercial capital Mumbai, it has since spread to a large number of states and severely affected the national capital, New Delhi. Most state governments have declared lockdowns, including leisure sector business closures.
While the original claim was that India, which had authorised emergency use of two vaccines being produced in-country, had at hand substantial capacity to roll out vaccines, it appears now that the vaccination drive is slowing for lack of supply. Given population size, the scale of the vaccination effort needed to achieve herd immunity is so large that it is unlikely to be completed before the end of the calendar year of 2021 and even be extended into 2022. Thus, if the surge in cases is not arrested by other means, economic activity is likely to be significantly affected. This would adversely affect the government’s expectations that after having contracted by 8% in the financial year April 2020-March 2021, the economy would bounce back through a ‘V’-shaped recovery.
Even that recovery is unlikely to have encompassed India’s large non-agricultural informal sector, where the loss of livelihoods and employment was the most severe. The plight of workers in this sector, many of them migrants, is partly reflected in the turn to the onerous employment provided under the government rural employment guarantee scheme, offering up to a maximum of 100 days of employment to adults in each rural household. Figures updated to April 1 show that around 112 million individuals availed of the scheme in 2020-21, a 42% increase from 2019-20.
Statistics by which official GDP is estimated inadequately cover informal sector enterprises and workers, underestimating the post-COVID-19 contraction and exaggerating the subsequent recovery. Ground reports indicate that even in metropolitan cities such as New Delhi, India’s capital, units that have shut down remain closed, and many are unlikely to reopen. This would have prolonged the crisis for many, even before the new surge in COVID-19 infections was factored in.
Now, matters could turn worse. There are no signs that the central government, which hiked spending in response to COVID-19 only by a little more than 1% of GDP, is likely to step up expenditures as promised. The budget for 2021-22, presented in February 2021, projected total central government spending to rise by less than 1% in nominal terms relative to what was spent in 2020-21.
The government’s thrust seems to be to intensify reform and offer concessions- such as reduced corporate taxes (slashed in September 2019) and production-linked cash incentives for incremental production in selected industries- to accelerate growth of output and employment, especially in manufacturing. But with demand depressed, this is unlikely to yield immediate results.
Meanwhile, a banking system that has cut back on credit provision because of the large volume of non-performing assets on their books, is likely to be weakened further by COVID-19. With a fiscally conservative government not wanting to spend its way through the crisis, banks have been called upon to help borrowers with moratoria on debt service payments, as well as support a range of sections with new credit on reasonable terms, when the probability of default has spiked.
The government has declared that an asset reconstruction company would be set up to take these assets off banks’ books. However, past experience does not instil confidence that they can resolve the problem.
While the Modi government is committed in principle to further opening the economy to imports and foreign investment, its actions indicate that it is willing to turn protectionist and insular in what it sees as the national interest. The government has also not been willing to accept international court judgements and arbitration awards.
These actions are also partly influenced by the government’s tendency to back select domestic business conglomerates, whose interests are privileged over foreign investors. For instance, India pulled out of the Regional Comprehensive Economic Partnership at the last moment, sensing that some industries, such as steel and dairy, would be adversely hit by cheap imports.
Internationally, there is a thaw in conflicts with neighbours China and Pakistan, with talks seeming to have facilitated a temporary truce and some troops’ withdrawal. But India’s effort to emerge as a challenger to China in collaboration with the United States and as a member of the Quad (Australia, India, Japan and the United States) keeps tensions brewing.
Protests and demonstrations, which had been effectively curtailed by COVID-19 lockdowns, are rising, as is evidence of public anger against the central government. Discontent over the amendment of citizenship laws and withdrawing the constitutional special status granted to Jammu and Kashmir remains rife. The decision to deprive the elected state government of Delhi, controlled by the Aam Aadmi Party, of all powers (which have been given to the lieutenant general, appointed by the central government) has intensified fears of suppression of state governments.
Farmers have been agitating along the capital’s borders and in different states against the farm laws for over seven months. Trade unions are unhappy with the government’s privatisation drive and labour law reform. State governments are angry that Modi’s government is centralising power in Delhi and depriving them of resources due as part of the tax revenue-sharing arrangement between the centre and the states.
Opposition parties have been appalled by the use of central agencies, such as the income tax authority, to raid the homes and offices of opposition leaders on charges of corruption, tax evasion and money laundering. How this would affect the performance of Prime Minister Narendra Modi’s Bharatiya Janata Party in provincial elections in Assam, Bengal, Kerala, Puducherry, Tamil Nadu and West Bengal (the results of which are due in early May 2021), is yet unclear. But the election campaign points to deep polarisation nationally.
TREND ►
Resistance to the Modi government’s policies in Kashmir continues, with close to 200 militants killed over 2020 and retaliatory action leading to the death of Indian forces and a host of civilians. Reportedly, official intelligence data point to a spike in recruitment of militants since the abrogation of Article 370, which granted Jammu and Kashmir special status within India’s quasi-federal framework.
Meanwhile there are signs that Maoist extremism in the eastern regions is on the rise. In April 2021, there was an ambush of security forces undertaking anti-Maoist operations in Bastar district of Chattisgarh state where 22 security personnel were left dead and 30 injured.
Large inflows of foreign institutional investment into India’s equity and debt markets have taken stock indices to record highs and taken foreign reserves to around USD580bn and helped keep the rupee relatively stable despite COVID-19 and rising trade deficits. However, India faces the risk of the exit of accumulated legacy footloose foreign investment.
The Modi government, however, expects to gain from its improved relationship with the United States. The Biden administration has not extended the H-1B visa issuance and travel ban imposed by the now-former Trump administration. However, there are frictions vis-a-vis the United States too: a US Trade Representative’s office investigation found that India’s Digital Services Tax of 2% imposed in April 2020 discriminates against US digital services companies and was unreasonable. This could invite action.
Under strong pressure from the rating agencies, Modi’s government has held back spending to keep the widening fiscal deficit from exploding. But the public debt-to-GDP ratio has risen from its pre-pandemic 72% to 89%, principally because government revenues have fallen sharply. Also, the differential between interest and growth rates has risen, raising questions regarding debt sustainability. The ‘silver lining’ is evidence that revenues collected through goods and services taxes that had slumped have revived and touched record levels.
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