Previous Quarterly Editions
Expropriation Risk: 52 53 53 55 ▲Political Violence Risk:57 57 57 57 ►Terrorism Risk:69 69 69 69 ►Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ►Sovereign Default Risk:57 37 57 47 ▼
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Besides unemployment, poverty and social deprivation, there are two macro-level challenges facing India today. The first is to trigger an economic recovery from the pandemic-induced slowdown, and to do so at a time when the international economic scene is least propitious, with first quarter GDP in fiscal year 2022-23 was only 2.8% higher than in the first quarter of pre-pandemic year 2020-21. The second challenge is to persuade the West, to which India’s government has pivoted, to allow India to maintaining a positive relationship with Russia. This includes granting India sanctions waivers in the context of the Western relationship with Russia plummeting over the Russian/Ukraine crisis from February 2022.
India benefits immensely from its relationship with Russia. Two major benefits are access to crude oil at heavily discounted prices and access to military equipment and spares, crucial to India maintaining some semblance of balance in military strength regarding hostile neighbours Pakistan and China. Estimates place India’s gain from importing discounted crude from Russia since the Ukraine crisis at INR350 billion (USD4.4 billion). This has been crucial at a time when world prices for oil and oil products have spiked. Despite the benefit of discounted oil, India is experiencing a significant widening of its trade deficit to USD124.5 billion during April-August of this fiscal year, as against USD53.8 billion in the same period last year. Boycotting Russian oil imports would only make matters worse.
The situation poses a dilemma for Delhi: India needs U.S. support in its stand-off with China and cannot let its relationship with Russia undermine such support. Yet equally, India needs to keep Russia from changing its mind on their long-standing friendship, as part of the latter’s closeness to China. In practice, Delhi’s strategy has been to serve as a frontline state in Asia in Washington’s effort to contain China, by joining the Quad grouping (Australia, India, Japan, and the United States) that is seen by China as an effort to construct an Asian version of NATO, and by joining in military exercises with these countries and other U.S. allies. Delhi also uses its special relationship with Russia to signal this is not an era for war.
While Delhi’s aggressive posture regarding China clashes with the closeness to Russia, it does result in a weak form of non-alignment, at a time when friendship with Washington and its allies is the thrust of Delhi’s foreign policy. Even so, sustaining this contradictory stance is increasingly proving difficult, with Washington demanding greater Indian closeness to the West.
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As India stays on a path of liberalisation and economic opening, aiming to build linkages with global value chains to expand its manufacturing base and perhaps displace China as a leading Asian manufacturing hub, there is little risk of expropriation. Earlier conflicts with international investors over retrospectively implemented demands for capital gains tax payments for acquisitions abroad of foreign firms with Indian operations have also been amicably settled.
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The risk of political violence has heightened because of the aggressive Hindu communal stance adopted by organisations linked to the ruling Bharatiya Janata Party. The prime targets of the aggression are Muslim citizens, who have been subjected to attacks on grounds varying from enticing Hindu women into marriage or slaughtering the revered cow, especially in the northern states. Attacks have also been directed at mosques.
Christians and their places of worship have also been hit. The response to such aggression and the fillip it provides to extremist elements often spills over into violence that brings economic and social activity to a standstill.
There is also a regional dimension to growing violence. Incidents of political violence in Jammu and Kashmir, whose special status was abrogated in 2019, and in border states in the northeast involving ethnic conflicts and territorial disputes between indigenous communities are also increasingly regular.
There are also increasing complaints of state violence in the form of arrest without trial of those engaging in legitimate dissent, or of the bulldozing of properties of those who are alleged to have engaged in anti-state activities. This has seen India’s ranking in indices measuring the degree of freedom and democracy in countries fall.
India sees terrorism of various kinds, including of the Hindu far right. This far-right terrorism has, in the extreme, included even assassination of those identified as anti-religious rationalists and atheists. Another form is Islamic terrorism of both the indigenous variety and inspired by organisations such as Al-Qaeda and Islamic state. There is also left-swing extremist terrorism in pockets across the country. While state action has reduced the incidences of such activity, it remains a problem that periodically surfaces, more so since the state turns a blind eye to certain kinds of violence.
Like all countries affected adversely by the pandemic and the costs of energy import dependence following the Russia/Ukraine crisis, India has been experiencing some stress on the trade and current accounts of the balance of payments. This has been compounded by exit of portfolio investors influenced by global uncertainty and expectations of significant increases in advanced country interest rates in response to inflation. Given the large stock of foreign portfolio capital in India, this poses a significant risk.
A consequence has been depletion of reserves. India’s foreign reserves are currently placed at around USD550 billion, down by around USD80 billion since the Russia/Ukraine conflict began. Unsurprisingly, the rupee has been depreciating against the U.S. dollar. However, unlike in many other emerging markets, India’s reserve position is still comfortable and rupee depreciation is more the result of the strengthening dollar. India’s government has been more concerned about the effects of the global food and grain crisis, and shortages that can result from excess exports given high international prices. In response, the government has opted for bans on exports of wheat and certain varieties of rice.
With an external debt-to-GDP ratio of 19.9% at end of March 2022, which is not notably high compared most emerging markets, and the share of foreign currency debt in total still low, there is little risk of sovereign default. The real problem is the increase in external commercial borrowing by the corporate sector during the era of low international interest rates. Much of this is not hedged and raises the rupee cost of debt servicing as interest rates rise and the currency depreciates. This raises the level of debt stress, raising the possibility of default even if not of a systemic kind.
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