India

Recovering economic momentum

B2

LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD2088.8bn (World ranking 7, World Bank 2015)
Population 1311.1mn (World ranking 2, World Bank 2015)
Form of state Federal Republic
Head of government Narendra Modi (Prime Minister)
Next elections July 2017, Presidential
  • 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

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.

 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 16%
1
17% China
United Arab Emirates 12%
2
6% United States
Hong Kong 5%
3
5% Saudi Arabia
China 3%
4
5% United Arab Emirates
United Kingdom 3%
5
4% Switzerland

Trade structure by product

(% of total)

Exports Rank Imports
Non metallic mineral manufactures, n.e.s. 11%
1
19% Petroleum, petroleum products and related materials
Petroleum, petroleum products and related materials 11%
2
8% Non metallic mineral manufactures, n.e.s.
Articles of apparel & clothing accessories 7%
3
7% Gold, non-monetary (excluding gold ores and concentrates)
Miscellaneous manufactured articles, n.e.s. 6%
4
6% Telecommunication and sound recording apparatus
Textile yarn and related products 6%
5
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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Collection complexity India

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