India rides the risks, with elections looming


Jeremy Weltman
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The country is defying global uncertainty and market turmoil in the lead-up to elections in 2019, with the country in a stronger position now to withstand the prospect of BJP falling.


India’s risks have not entirely disappeared, given the political cycle and potential for slowing capital inflows complicating external financing.

Increased market volatility stemming from global trade protectionism and rising US interest rates will be met by a concerted response from the Reserve Bank of India (the central bank), and attention will invariably become increasingly focused on the federal elections next year, and whether Narendra Modi’s business-friendly policies persist.

Uncertainty will increase in view of the latest opinion poll readings and by-election results signalling the possibility of the centre-right National Democratic Alliance led by Narendra Modi’s Bharatiya Janata Party (BJP) losing its majority in the lower house.

Positive signs

Yet India’s risk rating improved in Euromoney’s latest survey, resulting in the sovereign moving up three places in the global risk rankings to 53rd out of 186 countries, keeping its distance to Brazil, and closing in on Thailand and Bulgaria among investment grades.

Economic data has turned out to be unequivocally more positive in recent weeks.

Auto sales and bank lending figures, providing useful indicators of consumer demand, paint a rosy picture, signalling the economy has weathered implementation of the goods and services tax and the cash shortages accompanying the banknote demonetisation (currency exchange) aimed at curtailing illegal shadow economy activities.

Passenger vehicle sales rose by almost 20% year-on-year in the second quarter, with July credit data climbing 12%.

Sentiment in the manufacturing and services sectors is better off, with rising new orders fuelling exports, industrial production and GDP growth – signalling that the second quarter national accounts, to be released towards the end of this month, will endorse these favourable readings.

Risks easing

Euromoney’s survey experts have taken this on board, upgrading four of the five economic risk indicators on a like-for-like, year-on-year basis, alongside all six political indicators that are improving due to political stability and pro-business policymaking opening up the country to foreign investment.

Even the more conservative forecasters now predict GDP growth accelerating from the 6.7% outturn in fiscal year 2017/18 (to end-March), to more than 7%.

“We expect growth to pick up to 7.5% in the next fiscal years – supported by consumption and a pick-up in investment – and India to surpass China again as fastest growing giant”, says ABN Amro economist and ECR survey contributor, Arjen van Dijkhuizen.

IMF forecasts concur:

ecr india GDP growth graph 780

“The improved reform momentum under Modi’s government, better policies, a demographic dividend and ‘catch-up effects’ are structural factors supporting growth,” Dijkhuizen states.

Fast growth is of course crucial for development in a country with a low per capita GDP, trailing most of its peers, and can only be sustained through reforms.

The goods and services tax has created a unified internal market for the first time, and it will facilitate workers moving from informal to formal activities, bolstering federal government revenue, states the IMF in its latest assessment report.

Major steps have been taken to shore up banking sector stability –  a fairly low-scoring indicator in Euromoney’s survey, but one that is improving; India’s banks are rated more highly than China’s, or Russia’s, based on comparative risk scores.

A new bankruptcy code will improve the creditor-debtor balance. Banks’ recapitalisation, better identification of bad assets, and measures to improve governance are all making progress.

“As one of the world’s fastest-growing economies – accounting for about 15% of global growth –  India’s economy has helped to lift millions out of poverty,” the IMF states.

And with a stronger economy, India is no longer considered one of the “fragile five”, the most vulnerable EMs during the “taper tantrum” of 2013, when the current-account deficit was closer to 5% of GDP than its current level, less than 2%.


Financial markets were not overly perturbed by the recent tightening of monetary policy providing support for the rupee to dampen inflation pressure.

India is in a stronger state. The stock of foreign currency reserves has grown to more than seven months of imports, or four-fifths of external debt, and the budget deficit and debt metrics are on gradually improving medium-term trends.