Previous Quarterly Editions
Expropriation Risk: 48 50 52 53 Political Violence Risk: 58 55 57 60 Terrorism Risk: 69 66 64 63 Exchange Transfer and Trade Sanction Risk: 43 43 46 47 Sovereign Default Risk: 54 54 53 54
TREND ▲ OUTLOOK ▲
GDP growth slowed slightly from 8.2% in the first quarter of fiscal 2018-19 (March-June) to 7.6% in the second quarter and most estimates now suggest 7.3% for the year as a whole. Nonetheless, there continue to be signs that investment is recovering after a long period of stagnation. The ratio of investment to GDP rose slightly to 31% in the first quarter and figures from the country’s central bank, the Reserve Bank of India (RBI), show that non-performing asset (NPA) ratios in the banking sector are beginning to decline. This frees funds for investment, although it is not clear how much will reach the micro, small and medium enterprises that need it most. The Index of Industrial Production (IIP) hit a year-high 8.1% in October after averaging around 6% through the first half of 2018. Declining oil prices helped to bring inflation down to 2.5% in December from above 5% earlier in the year, and cheaper oil has also contributed to a reduction of the current account deficit to below 3%. However, India’s financial and fiscal stability could be significantly affected by the continuing policy conflicts between the RBI and the government. These have already led to the departure of Rajhuram Rajan as RBI governor in 2016 and in December 2018 his successor, Urjit Patel, resigned and was replaced by former bureaucrat Shaktikanta Das. The principal rift concerns the conservatism of the RBI’s monetary policy as the government seeks to increase both growth and spending in the run up to the 2019 general election. It remains to be seen how the markets will react to a looser policy framework. Investors are also paying close attention to the general election itself, which is due by May. Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) received a painful shock at regional polls in Rajasthan, Madhya Pradesh and Chhattisgarh in November when it lost control of all three state governments. Modi’s economic strategy has strongly favoured industry and modern urban development but in a country where two-thirds of the population live in the countryside and nearly half the labour force is employed in agriculture, this always risked a political backlash. Whether the BJP is re-elected depends in part on how far the many parties opposed to it can co-ordinate their campaigns. Amid many personality and policy clashes, this will not be easy and it is widely acknowledged that an opposition victory would result in a very unwieldy coalition government. Currently, it appears more likely that Modi will prevail again. However, his majority may be severely cut, leaving him dependent on the support of outside parties. In foreign policy, there are signs that China and India are attempting to reach accommodations on their economic policies and defence strategies. This follows growing strains between Washington and Delhi, especially over the Trump administration’s trade policies and sanctions on Iran and Russia, two countries with which India has close relations. Nonetheless, the military bonds between India and the US remain strong.
While India’s large trade surplus with the US makes it reluctant to seek an open confrontation with Washington, President Trump’s trade policies remain a major source of concern for Delhi. Although it has suspended implementation of the list of ‘counter-tariffs’ on US goods prepared earlier in retaliation for US steel and aluminium tariffs, India has joined with other countries, including China, in seeking WTO measures in support of free trade. New rules coming into force in February appear designed to protect those Indian companies able to combine an online presence with a network of brick-and-mortar stores from the growing competition coming from large foreign online retailers that have been building up their presence in the Indian market. Amazon and Walmart are among those affected by the new regulations.
With its development agenda rejected by voters in recent regional elections and far from certain of victory in the impending general election, Modi’s BJP shows signs of reverting to the politicisation of religion and caste. Against this background, the final months of the general election campaign could see extensive social violence. Elsewhere, tensions are rising in Kashmir, where the cross-religious coalition government has recently fallen. In the north-east of the country, strains over the National Register of Citizens in Assam have temporarily eased while an extended period of investigation takes place under the authority of the Supreme Court.
TREND ▼ OUTLOOK ▲
Maoist attacks in central India are becoming rarer and less coordinated, making little impact on the regional election held in Chhattisgarh in November. The occasional cross-border raids from Pakistan by ‘terrorist’ groups on military bases in Kashmir escalated sharply in February, as did the Indian military response. The previous administration in Islamabad tried to restrain these raids while pushing a diplomatic approach to Kashmir, but the new PTI government under Imran Khan is even more beholden to Pakistan’s military and relations with India are cooling again.
The resignation of RBI Governor Urjit Patel in December has underlined the tensions between the bank and the government on how far monetary policy should be relaxed in order to promote growth. The new governor has so far been cautious, with no general interest rate cut appearing imminent. However, with inflation starting to fall, there may be scope for more liberal measures in the coming months. The rupee has stabilised against the dollar on the improvement in India’s current account. Having worked with a number of other countries to find ways around US sanctions against Russia and Iran, both of which remain important trade and strategic partners, India has now obtained partial waivers from Washington that allow it to import Iranian oil for a limited time.
TREND ▲ OUTLOOK ►
The government and the central bank continue their campaign to overcome the debt problems of the banking sector, although with the focus switching from re-capitalisation to liquidating bad debt and discipling future lending. There is concern that the government will postpone tackling the fiscal deficit in favour of even greater than expected pre-election spending. However, foreign reserves are still strong, covering almost a year’s worth of imports, and any moderating of oil prices will have a positive effect.
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