Country risk expert insight – Q1 results: India


Catherine Snowdon
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The results of the latest Euromoney Country Risk quarterly survey saw India’s risk score rise 0.61 points. Year-on-year, the score is up by an impressive 2.72 points. With a score of 52.74, the country sits at 56 in the global ECR rankings. ECR asked two experts for their opinions on the reasons behind the improvement.

John Sharma, senior analyst, National Australia Bank

“India’s fortunes have improved steadily over the past year. Astute monetary management by the Reserve Bank of India (RBI), and a reform-minded approach by the Modi government have improved India’s situation on a number of key metrics.

“This is most readily apparent in the external sector. India’s current-account deficit has improved substantially: from a nadir of 6.8% of GDP in December 2012 to a current low of 1.6%. Further, foreign-exchange reserves have swelled to over $340 billion, the highest on record.

“As a result, India will be much better prepared to deal with any fallout from an anticipated Fed rate hike than it was a couple of years ago.

“Inflationary pressures have also eased substantially, due to efforts by the RBI as well as lower fuel prices – India’s largest import category. India is committed to an inflation-targeting framework, aiming for a 6% CPI outcome by January 2016. 

“This has further enhanced the confidence of overseas investors. The RBI is now on an easing bias, having already cut the benchmark repo rate by 50 basis points thus far in 2015.

“India’s budget was very pragmatic and had a strong focus on infrastructure spending. There were a number of important policy measures announced, such as the proposed implementation of the GST in April 2016. The issue of minimum alternate tax to be applied to overseas investors has raised concerns, and should be addressed in a transparent, consistent, manner.

“Successful implementation of the latter could be crucial, as it would improve the ease of doing business by eliminating a jumble of state and local taxes with a single tax.

“India’s economy is on an upward trajectory, although there remain some concerns about the quality of the new National Accounts Statistics.

“Going forward, it is important that India continues its reform focus – including improving the supply side through project clearances, land and power availability – to maintain the upward momentum.”

Arjen van Dijkhuizen, senior economist, ABN Amro

“During the British Raj (1858-1947), India was often referred to as the Jewel in the Crown, as Britain had cheap access to the country’s natural resources. Nowadays, India looks to be an Asian crown jewel once more.

“Recent GDP revisions have lifted growth rates by 1.5 to 2.0 percentage points. With growth expected at 7.5%, India will surpass China as the fastest-growing emerging giant this year, although India still lags behind its bigger Asian neighbour in development terms.

“This also illustrates India’s catch-up potential, certainly if it continues to push through reforms.

“Looking at the progress made by Modi’s government, one year after its convincing victory, the glass is half full in my view. The government has initiated several reforms, although progress is sometimes blocked by India’s complex federal model, as the BJP lacks a majority in the Senate and regional governments remain powerful.

“Meanwhile, thanks to prudent monetary policy, gold import restrictions and lower oil prices, external risks have fallen since the tapering tantrum in 2013, when India was classified as one of the fragile five.

“Despite these improvements, India remains vulnerable to turns in market sentiment, for instance triggered by a faster-than-expected Fed exit, while stalling reforms would pose another risk.

“All in all, the improvement of ECR’s risk score for India is in line with my expectations.”

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