Previous Quarterly Editions
Expropriation Risk: 48 48 50 52 Political Violence Risk: 58 58 55 57 Terrorism Risk: 73 69 66 64 Exchange Transfer and Trade Sanction Risk: 42 43 43 46 Sovereign Default Risk: 56 54 54 53
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Growth in the last quarter of fiscal 2017-18 accelerated to 7.7% to make 7.3% for the year. The IMF forecasts 7.3% again in 2018-19 and 7.7% the year after, which will be encouraging for the government. Particularly significant was the role of fixed capital investment, where growth recovered to 14.4% from just 9.3% in 2016-17 when private investment was a casualty of the recent slowdown. Nonetheless, problems remain. Manufacturing is still sluggish and output continues to slip. Inflation has risen above 5%, largely as a result of the retail impact of rising global oil prices, and triggered a rise in interest rates. As India imports 70% of its oil needs, rising prices have also put pressure on the balance of payments and the currency. The current account deficit passed 2% of GDP in the last quarter of 2017-18 and, with export growth weak, could reach 4% during the new fiscal year. The banking sector is another cause of concern, with non-performing loans continuing to rise rather than fall despite earlier government efforts to address the problem. They now stand at 12% overall and 23% in the public sector, leading the government to inject an additional 32 billion dollars into the public sector banks, while the central bank pursues a strict programme of debt re-structuring and forced bankruptcy. While a banking crisis is not imminent, credit growth will remain weak for at least the medium term. Although Prime Minister Narendra Modi has managed to hold the central government’s fiscal deficit at 3.5% for 2017-18, the government is planning to spend heavily as the next general election approaches. With the state governments exceeding their 3% target for the year, the total fiscal deficit is heading towards 7% of GDP. The general election that is due by May 2019 has already been casting a long shadow over the political landscape. Modi’s ruling Bharatiya Janata Party (BJP) is facing stiffening resistance as diverse opposition groups unite against him. The party failed to take back control of Karnataka during the regional elections in May and has lost a series of recent national by-elections. In response, Modi has started to target subsidies and job offers in the public sector towards constituencies that are currently hostile towards the BJP, including farmers and the unemployed. Farmers are now a serious problem for the BJP as they stage increasingly large protest rallies as they struggle with debt accumulated during recent droughts. The BJP has also begun to re-emphasise its Hindu nationalist identity in ways that threaten to alienate religious minorities and the low castes. Diplomatically, India’s close relationship with Washington has been increasingly damaged by the Trump administration’s trade policies and its attempts to sanction Iran and Russia, two countries with whom India has historic ties. As ties with Washington fray, Modi has been conducting a series of talks with Chinese President Xi Jinping aimed at reducing tensions and reaching new accommodations with Beijing on trade and security as well as agreements on issues that are uncomfortable for the US, such as farm subsidies and climate change. However, the problem of Pakistan, China’s ally with whom India’s rivalry is intensifying, continues to stand in the way.
President Trump’s trade policies are now a major source of concern for Delhi. India has prepared a list of ‘counter-tariffs’ on US goods in retaliation for US steel and aluminium tariffs and has joined with other countries, including China, in seeking WTO measures in support of free trade. It is also working with a number of other countries to find ways around US sanctions against Russia and Iran, who remain important trade and strategic partners. However, India’s large trade surplus with the US makes it reluctant to seek an open confrontation with Washington.
As the 2019 general election approaches, the ruling BJP and its allies are starting to re-emphasise Hindu nationalist themes at the risk of enflaming ethnic and religious tensions. The situation has not been helped by some recent judgements from the Supreme Court. It has struck down laws giving special protection to Dalits, questioned the clause of the constitution that gives special rights to Muslim residents of the Kashmir valley, and implemented a National Register of Citizens in Assam that seems intended to cast doubt on the civic status of four million immigrants from Bangladesh, most of whom are Muslim. All these judgements have the potential to spark social violence.
TREND ▼ OUTLOOK ▲
Maoist attacks in central India are becoming rarer and less coordinated. Occasional cross-border raids by ‘terrorist’ groups on military bases continue to take place in Kashmir. The previous administration in Islamabad had been seeking 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 are likely to cool again.
The central bank, wary of inflation, has resisted pressure from the government to cut interest rates and opted instead for monetary tightening after the monthly year-on-year inflation rate reached 4.9% in June. That month the bank raised rates by 25 basis points to 6.25%, the first hike since 2014, followed by a similar rise in August to 6.5%. That has helped to slow inflation but it remains substantially above the target of 4%. The rupee lost 9% of its value against the dollar between January and August, when it hit 70 to the dollar, mostly on the deteriorating trade balance and rising interest rates in developed economies.
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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