Economic Studies
India

India

Population 1 292,707 billion
GDP per capita 1603 US$
A4
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2014/15 2015/16

2016/17

(f)

2017/18 (f)
GDP growth* (%) 7.2 7.6 6.9 7.5
Inflation (yearly average) (%) 5.9 4.9 5.5 5.2
Budget balance** (% GDP) -7.3 -6.9 -6.7 -6.6
Current account balance (% GDP) -1.3 -1.1 -0.2 -0.5
Public debt** (% GDP) 68.3 69.1 68.5 67.2

 

(e) Estimated  (f) Forecast

*Take into consideration changes in GDP calculation method introduced in February 2015

** Includes federal public debt and debt for local authorities

Fiscal year: April – March 

STRENGTHS

  • Diversified growth driveres
  • High levels of savings and investment
  • Efficient private sector in services
  • Moderate level of external debt and comfortable foreign exchange reserves

WEAKNESSES

  • Lack of infrastructure and shortcomings in the education system
  • Bureaucratic red tape and persistent political tensions
  • Net importer of energy resources
  • Rising level of private firm indebtedness
  • Weak public finances
  • Persistent uncertainties over the Kashmir issue

RISK ASSESSMENT

Growth is expected to rebound

Business slowed slightly at the end of the 2016/17 fiscal year due to surprises decisions taken by the Modi administration in an effort to promote the demonetisation of the economy. In 2017/18, activity is expected to pick up. Consumption should rebound: it should continue to benefit from moderate inflation and transactions should return to normal levels after the tensions associated with the demonetisation measures. Improved financial integration of the poorest households will support demand. Moreover, harmonisation of the VAT at the federal level, planned for mid-2017, should also promote exchanges. Furthermore, despite the slight rise in oil prices, investment should continue to benefit from the weakness of commodity prices and the impact of reforms undertaken by Narendra Modi's government, which aim to promote the Indian manufacturing sector, attracting FDI and mitigating the constraints on the economy. However, progress is slow and the reforms implemented to clean up the banking system continue to affect the supply of credit, despite the loose monetary policy of the Reserve Bank of India (since January 2015 the key rate has been lowered by 175 basis points). Thus, private investment would remain below its potential. The infrastructure development plan including road, rail and electrical infrastructures should allow for significant public investments. However, budgetary constraints and delays of the reform on the grounds will limit the progress of these projects. In addition, exports should continue to suffer from a lack of competitiveness and sluggish global demand.
The service sector will continue to support growth, including the high-technology industry.

 

External accounts are under control but public finances remain weak

Despite the desire to consolidate public accounts, the fiscal deficit and public debt level remain high. Nevertheless, the country has initiated a plan to reduce the deficit and lower public debt. These fiscal consolidation efforts are facilitated by low energy prices. In addition, measures to demonetise a portion of outstanding bank notes should improve budget revenue by reducing the weight of the informal economy.
The current account deficit is expected to remain contained despite the slowdown observed in exports. Indeed, weak commodity prices should help to control the value of imports.
The rupee is expected to remain relatively stable in 2017, the current account deficit being limited and foreign exchange reserves at comfortable levels (nearly 10 months of imports in 2017). Moreover, FDI and portfolio investment are on an uptrend, supported by the easing of regulations. However, like other emerging currencies, the rupee remains vulnerable to a rise in global risk aversion and the evolution of the US monetary policy.

 

Narendra Modi's government could be weakened by the unpopularity of reform implemented to promote demonetisation of the economy.

Following the legislative elections in May 2014, which saw the BJP (Bharatiya Janata Party) win by a large majority, N. Modi was appointed Prime Minister and his party holds an absolute majority in the lower house of parliament. Elections in several important states confirmed the popularity of the BJP but the party has experienced several electoral setbacks, especially in Delhi and Bihar. The Congress Party continues to dominate the Upper House which is delaying the reforms long-awaited by the business community, which responded very positively to the election of N. Modi. Nevertheless, the popularity of Prime Minister Modi deteriorates while he withdrew, without notice, the ability to use certain bank notes so that they could be demonetised.
Even though N. Modi record, as he was Chief Minister of the State of Gajarat, was tainted by the 2002 violence in which thousands of Muslims died, his election was welcomed by partners of India.
Despite Prime Minister of Pakistan attending the nomination of Prime Minister Modi, relations with Pakistan remain tense regarding the Kashmir issue. The prime ministers of India and Pakistan met in late December 2015 in Lahore. Nevertheless diplomatic talks were suspended after an attack on an Indian base in the Punjab State in January 2016. Moreover, relations between the two countries have, again, seriously worsened as a result of the attack, in September 2016, of an Indian base by a rebel group. India retaliated by surgical strikes along the boundary line that separates Kashmir. However, an escalation of violence is unlikely, Pakistan and India have an interest in maintaining the status quo.
Finally, despite the reforms, the business environment will continue to suffer from persistent weaknesses.

 

Last update : January 2017

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