Recovering economic momentum

Country Rating B1


  • Stable democracy, with peaceful changes of government
  • Large internal market, providing some insulation from global business cycle
  • Successful diversification into manufacturing (motor vehicles) and services (including call centres, IT and biotechnology)
  • High annual GDP growth
  • External debt is low relative to earnings and repayment capacity
  • Strong foreign exchange reserves


  • Vulnerable to natural disasters (including tsunami, droughts, floods and earthquakes)
  • The Kashmir region remains volatile and a source of potential conflict
  • The political system tends to engender coalition governments that lack the ability to push through economic reforms
  • Poverty remains pervasive and income distribution uneven
  • Structural weaknesses include inadequate infrastructure, current and fiscal account deficits and state involvement crowds out private sector initiatives in some sectors
  • Weak structural business environment

Economic Outlook


A turnaround in the making?

Growth slowed at the end of Fiscal Year 2016-17 as the economy felt the bite of demonetization. Domestic demand growth slowed due to a contraction of investment and slower private consumption, strong government expenditures provided some offset. Exports gained some traction. 


Looking forward, there are signs that the negative effects of demonetization are abating, and that the economy would turn around in the upcoming quarters. Exports are improving in line with higher global demand; the re-monetization of the economy is set to translate to a gradual improvement in private consumption. In the longer term, improving financing conditions will be critical to boost investment and thus create a sustainable growth environment. A strong rise in deposits after the demonetization shock gives banks more leeway to cut lending rates. Progress on reforms (GST, Bankruptcy law) should be conducive to attracting foreign investment. In that context, GDP growth is set to expand by +7.2% in FY2017-18 (after +7.1% in FY2016-17).


Macro-policies: prudence is the key 

Fiscal discipline will be maintained. Despite a strong improvement over the past ten years, public debt is still elevated (see Figure 1). The government will keep fiscal consolidation on track but the pace will be slower in order to absorb the pain of demonetization. In FY2016-17, the government achieved its target to reduce its deficit to 3.5% GDP (from 3.9% GDP). The objective for FY2017-18 is 3.2% GDP; the initial 3% target has been postponed to FY2018/19.  


The central bank may maintain a “wait and see” approach in the near-term due to rising uncertainties. The Central Bank is faced with a dilemma: either cut rate in order to boost economic growth; or adopt a defensive stance in the wake of (i) excessive liquidity in the banking system after the demonetization shock, (ii) upside risks to the baseline inflation outlook and (iii) a potential Fed Hike. 


A weak banking system and challenging business environment still weigh on the outlook

A weak banking system is still a matter of concern: gross non-performing loans ratios was 7.5% in FY2015-16 (from 4.3% in FY2014-15). Structurally, a difficult business environment remains the main impediment to growth. The country still ranks poorly in terms of Doing Business, ranked 130th out of 190 countries in the World Bank’s survey, with a poor tax environment and a weak regulatory environment to enforce contracts. 






    USD 2088.8bn
    (World ranking 7, World Bank 2015)


    1311.1 million
    (World ranking 2, World Bank 2015)

    Form of state

    Federal Republic

    Head of government

    Narendra Modi (Prime Minister)

    Next elections

    July 2017, Presidential

    Last reviewed: 22/06/17

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