Country risk: India takes a rain check, but it’s no monsoon


Jeremy Weltman
Published on:

Its sovereign risk score has eased back this year as doubts begin to creep in, but India remains worthy of investment grade.

India rain-R-600
Taking shelter: but it would be wrong to be overly concerned

India’s risk score fell by almost a point to 53.9 from a maximum of 100 in Euromoney’s country risk survey in Q1 2016, partially retracing its improvement last year when the borrower stood out among the Brics as the one major emerging market (EM) becoming safer.

Its government-stability indicator has softened, and there are some doubts over the reform process, which “has proved to be slower than envisaged when the new government took over”, says Madhavi Arora, an economist at Kotak Mahindra Bank and one of 36 experts covering India in the survey.

There are efforts under way to resolve the non-performing loans burdening the banking sector, but political gridlock is holding up aspects of the government’s reform agenda.


Therefore, despite strong GDP growth, the general government deficit remains stubbornly resistant to narrowing any further, and is predicted by the IMF to be 7% of GDP in 2016/17 (April-March), unchanged from 2015/16.

That will sustain the general government debt burden at around 66% of GDP.

Yet the main reason for India’s increased risk lies in its lower capital access score, highlighting the fact global investors are generally more cautious about EMs as an asset class, which makes India’s capital inflows vulnerable.

These risks are unlikely to fade owing to China’s problems, the US elections and Fed rate hike, Brexit uncertainty, the Greek bailout agreement and the commodity supply glut.

However, it would be wrong to be overly concerned or attribute the fall in India’s score as a fundamental weakness.

Madhavi Arora,
Kotak Mahindra Bank

“India continues to outperform most of its EM peers in terms of its improving economic growth dynamics, inflation and external account parameters,” says Kotak Mahindra’s Arora.

There is the feeling, too, that the same terms of trade gain that occurred in 2015/16 is unlikely to be repeated, while recently various manufacturing and services indicators have softened. Yet the low prices of oil and other commodities continue to benefit India.

Indeed, its economic risk indicator scores are unchanged this year, with GDP growth likely to remain slightly above 7% in real terms during 2016-17, according to the IMF, similar to the fiscal year just completed.

Inflation, having fallen in recent months to below 5% in March, is lower than is historically the case.

Plus, the current-account deficit, estimated at 1.5% of GDP, has remained manageable for the past four years, with foreign-exchange reserves exceeding $360 billion for the first time in mid-April, providing a decent cushion of roughly eight months’ worth of import cover.

As with any EM, the investor outlook is never one accompanied by complete safety, but India, which still ranks 57th in Euromoney’s global rankings, remains a safer bet than Brazil or South Africa.


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