India: At a crossroads


LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD2597.5bn (World ranking 6, World Bank 2017)
Population 1339.2mn (World ranking 2, World Bank 2017)
Form of state Federal Republic
Head of government Narendra Modi (PM)
Next elections 2019, General election
  • 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
  • Low external debt 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

Growing fast

India was the fastest-growing economy (+7.4%) among the G-20 in 2018, clearly above China (+6.6%). Growth strengthened over the past five years, helped by better management of macroeconomic policies and clearer policy direction. Prudent fiscal and monetary policies helped debt stabilization (70% of GDP), and reduced inflation (below +5% in 2018 against an average of +10% p.a. over 2009-2014) and external imbalances (current account deficit stabilized below -3% GDP). The business environment has also improved, as evidenced by India’s progress in the World Bank’s Doing Business survey (+53 ranks over the last two years).

Looking ahead, we cautiously expect economic growth to be relatively solid at +7% over 2019 and 2020. The first half of this year will see relatively slow growth due to weaker global trade growth and an elevated degree of uncertainty around the elections. Both would lead companies to be more cautious in their spending. Later on in the year, we expect investment to pick up speed. Clearer policy direction after the elections will allow better planning for corporates. And favorable macro-policies, namely a rise in public capex in infrastructure and an accommodative monetary policy, will support the rise in investment. The RBI already cut the policy rate twice over the first five months of 2019 and a further cut (-25bp) could come  by the end of the year.  Private consumption is set to be robust. Low inflation and a favorable fiscal policy will provide a boost to purchasing power. Job creation is expected to get some traction as investment rises. 

Balanced risks

Risks to the outlook are relatively balanced. In the near term, we are wary of potential policy mistakes, especially (i) much less fiscal discipline and (ii) less independence of the central bank. Both could act as a drag on investor confidence and reduce much needed capital inflows. Note that financial resources are limited. Even though it is stable, public debt is high (general government debt at around 70% of GDP). Moreover, the banking sector is constrained by high non-performing assets (the system-wide gross non-performing assets ratio rose to 11.2% in FY2017-18) and savings are too low compared to investment, resulting in a current account deficit.  Externally, the more US-China trade tensions escalate, the higher the impact on their trade partners, including India. But in the longer term, the next cycle could be conducive for the Indian economic model.

On the positive side, lower oil prices (projected at USD67 per bbl on average over 2019-2022) could lead to a reduction of the merchandise trade deficit and inflationary pressures, which should support private consumption. Moreover, a trade diversion (as a result of the US-China trade spat and increasing costs in China) and the servitization of manufacturing and global trade (the delivery of a service component as an added value when providing products) could also provide opportunities for Indian exporters. 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 16%
17% China
United Arab Emirates 12%
6% United States
Hong Kong 5%
5% Saudi Arabia
China 3%
5% United Arab Emirates
United Kingdom 3%
4% Switzerland

Trade structure by product

(% of total)

Exports Rank Imports
Non metallic mineral manufactures, n.e.s. 11%
19% Petroleum, petroleum products and related materials
Petroleum, petroleum products and related materials 11%
8% Non metallic mineral manufactures, n.e.s.
Articles of apparel & clothing accessories 7%
7% Gold, non-monetary (excluding gold ores and concentrates)
Miscellaneous manufactured articles, n.e.s. 6%
6% Telecommunication and sound recording apparatus
Textile yarn and related products 6%
5% Electrical machinery, apparatus and appliances, n.e.s.

DSO in India is 67 days, late payments are not regulated and ownership protection may be difficult to enforce.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

The court system is complex while extensive delays and costs make legal action difficult. Accelerated proceedings are not available for undisputed debts and foreign debt judgments would be enforced with difficulty.

A new insolvency regulation provides a framework for debt restructuring, priority rules, time frames and clawback, but in practice, once the debtor is insolvent, chances of recovery are virtually impossible.

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