Previous Quarterly Editions
Expropriation Risk: 53 54 52 50 Political Violence Risk: 60 62 60 64 Terrorism Risk: 63 65 68 68 Exchange Transfer and Trade Sanction Risk: 47 50 48 48 Sovereign Default Risk: 54 55 56 56
TREND ▲ OUTLOOK ▲
The Citizenship (Amendment) Act (CAA), passed in the final weeks of 2019, prompted protests and rioting across India. The act makes it easier for non-Muslim migrants who entered illegally from neighbouring South Asian countries before 2015 to claim Indian citizenship by reducing their residency requirement to six years from eleven. Some critics believe it fosters religious discrimination by excluding Muslims, while others fear increased migration to areas in the north-east of India. As clashes between police and protesters left 30 people dead, mainly in Uttar Pradesh, within a week of the CAA becoming law, Prime Minister Narendra Modi’s government delayed official notification of the act. Although a blatant U-turn on the legislation is not a political option, it first looked as though Modi would simply fail to implement it but pressure from within his own Hindu nationalist Bharatiya Janata Party (BJP) may make this a much bigger challenge than initially anticipated as the issue continues into 2020. Modi must also contend with the continuing economic slowdown that began towards the end of fiscal 2019 and left growth at 5% rather than the earlier projections of 6.5-7%. As a result, 2019 saw the weakest growth in over six years and India entered 2020 with a ‘negative’ outlook from Moody’s. The main cause is a precipitate decline in consumption on top of a longer-term deterioration in investment. Household consumption was 3.7% lower at the end of fiscal 2018-19 than at the start. The government’s first response to the slowdown has been to revive investment by reducing non-performing asset ratios in the banks, cutting interest rates and slashing corporate taxes. But it will now need to stimulate demand more directly by easing the credit crisis and increasing guaranteed rural employment wage rates. However, it has limited room for fiscal manoeuvre if it is to keep the central deficit close to its target of 3.3% of GDP. Nonetheless, the outlook is not entirely gloomy. The government has started to undertake long-overdue structural reforms, particularly in the area of labour laws, and most forecasts anticipate a recovery to growth of 6-6.5% in fiscal 2020-21. Even before the CAA protests, however, the onset of the slowdown had weakened confidence in Modi’s government only months after his landslide general election victory. The BJP has struggled to retain power in recent state elections in Maharashtra and Haryana, while the situation in Kashmir has the potential to worsen. There is little sign that the Muslim majority in the Kashmir valley is reconciled to the removal of the state’s special constitutional status in August, which is expected to increase the region’s Hindu population. Although the winter snows will dampen political protest during the first months of 2020, if the detention of local political leaders continues into the spring and the CAA remains a divisive issue, then the risk of unrest becomes serious again. The situation in Kashmir is also increasing tensions with Pakistan, and a failure to return the Kashmir valley to civic ‘normalcy’ could see both the UN and the US Congress raising human rights issues with damaging diplomatic consequences for India.
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The November talks in Delhi with US Trade Representative Robert Lighthizer went some way towards bringing a bilateral trade closer in 2020. This would be a major success for Modi, although frictions continue over US tariff policies and Indian arms purchases from Russia. Meanwhile, Chancellor Merkel, who also visited in November, urged renewed attempts to negotiate an India-EU free trade agreement, not least to provide a counterweight to China in the Indo-Pacific. As it pursues Washington and Brussels, Delhi has declined to join the Regional Comprehensive Economic Partnership (RCEP), a projected free trade agreement involving the ten ASEAN states and several Asia-Pacific partners including China. A concern for Modi is that foreign investors have noted the extent to which the recent Supreme Court judgment ordering telecom companies to pay billions of dollars in historic fees and fines has hit the UK’s Vodafone particularly hard. Its joint venture is struggling for market share against the dominance of Jio, a subsidiary of Reliance Industries, and Vodafone is threatening to pull out of the country.
The violence in Uttar Pradesh over the CAA led to almost a thousand arrests as the government banned public assemblies, cut off internet access, and asked broadcasters not to cover the protests. The Supreme Court’s judgment at the end of 2019 on the disputed ownership of the site of the Ayodhya Babri Masjid accepted Hindu claims of ownership but declared the Muslims to be victims and awarded them additional compensation. While the economic slowdown is making the government more determined to press ahead with labour reforms, it has also strengthened union determination to resist, setting up the risk of clashes during 2020.
TREND ► OUTLOOK ▲
The government has strengthened its military position in Kashmir after it downgraded the state’s special constitutional status and reduced it to a directly administered Union Territory. However, with Pakistan seeking to make Kashmir’s change of status and effective military occupation the subject of international condemnation, there is scope for the issue to attract jihadist support from across the Islamic world, especially if Afghanistan moves towards a political settlement.
The central bank kept interest rates at 5.15% in December, resisting the temptation of a sixth cut in 2019 as it prepares for the inflationary effect of further fiscal loosening by the government in 2020. This is likely to include more spending on public infrastructure to boost employment as well as income tax cuts and direct cash transfers. The bank is also concerned that previous cuts have not been passed on to borrowers. The rupee stayed relatively steady against the dollar during 2019, falling by only 2%.
Public spending is already straining prudent limits but will continue to grow in 2020 as the government tries to boost growth. The central government deficit figure of 3.5% masks a total figure, including the deficits of state governments and public sector industries, that is closer to 9%. Nonetheless, greater access to foreign debt funding should help ease the strain and foreign exchange reserves above 420 billion dollars continue to provide a comfortable cushion.
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