Previous Quarterly Editions
Expropriation Risk: 50 52 53 54 Political Violence Risk: 55 57 60 62 Terrorism Risk: 66 64 63 65 Exchange Transfer and Trade Sanction Risk: 43 46 47 50 Sovereign Default Risk: 54 53 54 55
TREND ▲ OUTLOOK ▲
Economic growth for the fiscal year 2018-19, running from April to March, was 7.2%, slightly below initial estimates following a slowdown in the second half of the year. However, with a steady recovery now expected, most forecasts anticipate around 7.5% for 2019-20. Investment is picking up, with the private sector contributing more than 10% of gross capital formation in 2018-19. Increased investment partly reflects an improvement in the state of non-performing loans in the banking sector, although the overall figure for non-performing assets (NPA) remains close to 10%. However, India has yet to overcome the debt and liquidity problems constraining its investment performance in recent years. Elsewhere, the current account deficit has held steady at around 2.5% of GDP with exports growing at 9% able to offset increases in the price of imported oil. The deficit is covered by earnings from overseas remittances and ‘invisible’ services, each of which had a surplus of 70 billion dollars in 2018-19. Foreign direct investment held up at 33 billion dollars in the first 8 months of the year and foreign portfolio investment swelled by 10 billion dollars between February and mid-April 2019 alone. However, the suspension of operations by Jet Airways in April has again underlined some of the commercial challenges posed by government policies. India's airport charges are among the highest in Asia, the excise duty in fuel is very high at 11%, and a government initiative to improve regional connectivity required half the seats on newly licensed routes to be sold under a strict low-pricing formula. The recent tension over policy between the RBI, the country’s central bank, and the government appears to have been resolved in favour of the government. Since former bureaucrat Shaktikanta Das was appointed governor, the RBI has cut interest rates twice in line with the Modi administration’s call to promote growth. This call partly reflects the pressures of the general election, a nationwide process held across two months and finally completed on May 23. However, it has also raised questions about political interference in the regulation of the economy and the independence of the RBI. Political parties went into the general election after the regional elections held in December had indicated that Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) has lost popularity since its imposing triumph in 2014. However, running a heavily nationalist campaign enabled Modi’s coalition to retain its parliamentary majority and the BJP itself did well enough to become in effect a single-party government. This now gives Modi the added challenge of containing the extremist elements of his own party. Since February, the cause of the Hindu nationalist BJP has been helped by a military confrontation with ‘Muslim’ Pakistan over a terrorist atrocity at Pulwama in Kashmir linked to the Pakistan-based militant Islamist group Jaish-e-Mohammed. The two countries have come close to war, stimulating popular nationalist sentiments that may be hard to tame.
While India’s large trade surplus with the US makes it reluctant to seek an open confrontation with Washington, President Trump’s trade policies in areas like steel and aluminium remain a major source of concern. The most recent US actions include India’s removal from its General System of Preferences (GSP) and an abrupt end in May to the waiver on sanctions that prevent India for importing oil from Iran. Thus far, India’s strongest response has been to protect its retail sector from online competition from US-based giants such as Amazon and Walmart. Popular resentment in the agricultural sector over the enforcement of patent protection by multinational corporations is growing quickly.
With its development agenda rejected by voters in recent regional elections and approaching the general election far from certain of victory, Modi’s BJP responded by reverting to the politicisation of religion and caste. Against this background, the final months of the general election campaign saw extensive social violence. This has been made worse by the recent confrontation with Pakistan over the Pulwama terrorist attack. In a political climate close to war, Hindu nationalism has become increasingly assertive at the expense of the Muslim community and may continue to be so after the election.
In February, some 40 Indian paramilitary police were killed in an attack at Pulwama in Jammu and Kashmir state. The Jaish-e-Mohammed (JeM) militant group, which Delhi says is one of the terrorist organisations targeting India that is harboured by Pakistan, claimed responsibility. In the days that followed, both sides exchanged air strikes and at least one fighter was shot down. In addition to promoting confrontation between India and Pakistan, the Pulwama terrorist attack threatens to re-ignite separatist insurrection in the Kashmir valley, where there has been a wave of killings in recent weeks despite a strong military presence. Elsewhere, there was little interference from militant groups during the general election but the intelligence services are exploring any links between the terrorist attacks in Sri Lanka in April and Islamist sympathisers in India.
The RBI monetary policy committee chaired by Governor Shaktikanta Das, appointed by the government in January, cut interest rates twice before the election and appears keen on further reductions. While partly justified by falling inflation, these cuts were not expected by markets but met government demands for faster GDP growth. The cuts have reinforced concerns about deepening political interference in India’s economic regulation, including allegations from a group of 108 Indian-origin international economists, headed by former RBI head Raghuram Rajan, that official figures emphasising strong growth may have been manipulated for political ends.
TREND ► OUTLOOK ►
The government and the RBI have made some progress in tackling non-performing assets, especially among public sector banks where the problem is most acute. However, stricter bankruptcy regulation has been deferred following a Supreme Court judgment in April 2019 questioning the scope of the RBI’s authority to direct the management of commercial banks, even in the public sector. The judgment is likely to complicate central economic strategies aimed at cutting debt and improving bank liquidity. Foreign reserves rose to 414 billion dollars in April, representing 11 months of import cover.
Return to contents Next Chapter