Risk experts remain cautiously optimistic about India’s prospects


Jeremy Weltman
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The sovereign’s fortunes are still improving since the sell-off last year sent the rupee spiralling downwards. With India now back on investors’ radar, Euromoney’s Country Risk Survey contributors offer their thoughts on what lies ahead.

Climbing three places this year in ECR’s survey, India’s improving fortunes have seen it climb above Russia in the global rankings (to 62nd out of 186 sovereigns) and into the third of five tiered categories commensurate with a BB+ to A- rating.

India is rated a stable BBB- investment grade by Fitch, and Baa3 by Moody’s, with S&P poised to alter its ‘negative’ BBB- rating back to ‘stable’.

The landslide election victory for Narendra Modi in May brought optimism that India’s dwindling fortunes would reverse. Government stability – one of the survey’s six political risk indicators – has improved enormously in the light of Modi’s National Democratic Alliance sealing a strong parliamentary majority.

Moreover, after last year’s capital outflows sending the rupee plummeting in the wake of India’s twin-deficit concerns, country-risk experts have similarly raised their scores for monetary policy/currency stability.

Arguments persist over to what extent the prime minister’s first 100 days in office have established a bedrock for success. Several interesting policies have been announced, including new labour laws, and administrative changes to streamline the bureaucracy and remove bottlenecks preventing more foreign investment – though protected negotiations between the national and state governments are likely to delay implementation.

GDP growth accelerated to 5.7% year-on-year during the second quarter – its strongest pace in more than two years – and with rebounding exports and restrictions on gold imports reversing the trade-balance deterioration, India’s current-account deficit totalled less than $8 billion (just 1.7% of GDP) during the same period.

Efforts have been made to deal with food price issues after a poor monsoon, while still-high inflation has been held in line with the Reserve Bank’s 8% target.

Yet on a total risk score of 51.1, India barely racks up more than half the points available in ECR’s survey, highlighting only tentative confidence in the country’s fortunes. Russia’s fading fortunes have dealt a favourable hand, but India still trails China and Brazil by some margin, with labour relations, infrastructure, government finances and the regulatory and policymaking framework all racking up less than five out of 10, having slipped down the World Bank’s Doing Business rankings to 134th out of 189 economies.

Corruption is an endemic risk, scoring 3.1 out of 10, and many doubt too that stronger economic growth is sustainable without deeper reforms.

Gargi Sanati, at the National Institute of Bank Management in Maharashtra, has not perceived any fundamental improvement in the economy, noting the debatable success of the Gujarat model of development Modi pursued as chief minister, now being rolled out nationally.

“I don’t believe in any magic wand,” she says. “The major problems India is facing are related to inflation and growing inequality.

“Also, in education, health and employment generation, it would be difficult for any government to show much improvement unless they work beyond their mere political interest.”

The government inherited a worse fiscal deficit than expected, and economists were disappointed its first budget bill missed an opportunity to tackle food, fertilizer and petroleum subsidies. A credible strategy is required to revive agricultural growth and productivity.

Madan Sabnavis, an economist with Credit Analysis and Research in Mumbai, remains sanguine. “India is poised for a turnaround, though the pace will be gradual,” he says.

“The government has made it clear it will move along the path of fiscal prudence and hence will not go beyond the budgetary allocations. The focus is more on the public-private partnership form of investment and the government will be a major enabler of business activity without directly spending more than it can.”

Madhavi Arora, at Kotak Mahindra Bank, another Mumbai-based economist, believes the markets are beginning to question Modi’s credibility, but also argues that small steps toward the reform of sensitive issues should not be ignored. “Reforms are a process, not an event,” she says.

“To its credit, the government is committed to reducing the fiscal deficit to 4.1% of GDP in the current year, despite pressures to jumpstart growth.”

The government might also begin to tackle petroleum subsidies more forcefully if it wins some of the critical state assembly elections in 2014/15. That could strengthen the trust imbued in Modi, underpinning India’s improving risk score as experts remain cautiously optimistic the country has turned the corner.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.