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India Business Forecast Report Q3 2014

  • April 2014
  • -
  • Business Monitor International
  • -
  • 50 pages

Core Views

There remains a high degree of uncertainty over the end results, due to increased factors driving a fragmentation of the vote, in India's lower house elections being from April 7 to May 12. We maintain our expectations for the opposition (and more market-friendly) Bharatiya Janata Party (BJP) to lead the next coalition government. Fuelled by the disappointment rule of the United Progressive Alliance (UPA)'s second term in office, this had initially had significant realisation potential. However, since the impressive vote win in the state of Delhi, the BJP now faces threats from both its old adversaries such as the Indian National Congress, as well as new competition from
up and coming parties such as the Aam Adani Party (AAP).

India's painful process of external rebalancing is almost complete, and this will set the stage for an economic growth revival in FY2014/15 (April-March). The pace of recovery will depend on the timing of monetary easing, as well as a decisive and business-friendly outcome to the 2014 general elections. We are optimistic on both these fronts and expect investment activity to pick up materially over the course of the year. Our constructive outlook is reflected in our 2014 real GDP growth forecast of 5.6%, which sits above consensus expectations of 5.4%.

Although headline inflation has eased somewhat in India, it remains at elevated levels, amongst the highest in the region. Acute food price pressures, as supplies often constrained by logistical inefficiencies and prices, further boosted by minimum support levels dictated by the government, lie at the heart of the problem. Expansionary government policy further exacerbates these pressures. Short of a major reduction in subsidies and minimum support prices for agricultural goods, both of which are unlikely even post-election, there is a risk that the Reserve Bank of India (RBI) may be forced to keep interest rates tight for longer in FY2014/15.

The Indian rupee remains one of our favourite currencies in the region currently. We expect the unit to average INR58.00/USD in 2014, roughly 6.3% above the current spot of INR61.90/USD, as external risks recede and investors turn their attention to the significant value on offer. Bolstering our case is India's increasingly constructive macroeconomic outlook, which should see the economy embark on a growth recovery in the second half of the calendar year.

Major Forecast Changes

We have pushed back our interest rate expectations for India. We now expect the RBI to remain on hold for the rest of FY2013/14, before delivering monetary easing worth 25bps in the second half of the following fiscal year. Owing to the possibility of that the RBI will roll back its current restrictions on gold imports, we have pared back our expectations for the pace at which India narrows its current account deficit.

Table Of Contents

India Business Forecast Report Q3 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Re-Emergence Of The 'Third Front' Poses No Major Threat 8
We note that the present response from 11 minority political parties in India to create a political alternative, known as the 'Third Front',
could marginally erode the advantage of leading opposition Bharatiya Janata Party (BJP). However, we maintain our view that the BJP
will muster the largest number of seats and form the next government (with the help of coalition partners).
Long-Term Political Outlook 9
The Test Of Rising Prosperity 9
While India's 60-year-old democracy has withstood the test of poverty, the coming decade will show whether it can withstand the test
of rising prosperity. Against a backdrop of economic growth, India's government will need to work even harder to combat poverty and
inequality; invest in education and infrastructure; and clamp down on corruption in order to satisfy an increasingly cognisant electorate.
Meanwhile, icy relations with neighbouring Pakistan and growing competition with China will continue to dominate India's international
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Weak GDP Print Could Boost BJP's Election Chances 14
We have revised down our forecasts for India's real GDP growth for FY2013/14 to come in at 4.4%, on the back of a weak GDP print
for the October to December quarter of 4.7% y-o-y. This downgrade was, in part, due to significant downward revisions made to
Q1FY2013/14 data, but also reflects our dim outlook for capital investment.
Fiscal Policy 16
Political Costs, Structural Deficiencies Limit Upside For Fiscal Accounts 16
Despite our projection for India's GDP growth to improve in FY2014/15, we believe that the government will struggle to implement fiscal
reforms, which will limit the upside for the country's fiscal accounts. This is due to the high political costs to roll back expensive income
support and subsidy programmes, as well as the lack of infrastructure to improve tax collection.
Monretary Policy 17
Hawkish And Reform-Centric RBI Less Likely To Cut Rates 17
We have pared back our dovish expectations on Indian interest rates, forecasting the RBI to cut its policy rate by 25bps by end-
FY2014/15 (April-May) compared to our previous projections of 50bps. In addition to a pick-up in new orders that could provide a
temporary boost to economic activity, the RBI maintains a hawkish stance on rates despite easing inflationary pressures. Moreover, we
note that reforms to improve the transmission mechanism of monetary policy currently underway should improve the effectiveness of
future rate cuts.
Balance Of Payments 19
Removal Of Gold Curbs To Widen Current Account Deficit 19
We believe that the current restrictions on gold imports will be partially rolled back by H1FY2014/15 (April-March), although the elevated
import tariffs are likely to remain unchanged. This will likely lead to a resurgence in gold imports, which we expect to result in the
widening of the current account deficit in FY2014/15 to 3.7% of GDP versus a projection 3.4% of GDP for the current fiscal year.
Chapter 3: 10-Year Forecast 23
The Indian Economy To 2023 23
Will Indian Growth Live Up To Expectations? 23
Improving demographics, structural reforms and trade liberalisation in India during the 1990s set the stage for an explosion in the
country's domestic savings rate, which, in turn, ignited economic growth in the 2000s. Going forward, favourable demographics and
trade integration should remain strong tailwinds. However, should India's reform momentum continue to disappoint, the country could
struggle to generate sufficient savings growth to finance its investment needs, with headline economic growth suffering as a result. With
this in mind, we are happy to maintain a sanguine, if cautious, long-term growth outlook with a 10-year average real GDP growth rate of
6. 3%.
table: Long-Term Macroeconomic Forecasts 23
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Investment Climate 28
Hurdles To FDI To Linger Even After Elections 28
We believe that even with the potential for a business-friendly election outcome, foreign direct investment (FDI) into India is likely
to remain subdued for the coming fiscal year 2014/15 (April-March). Domestically, high levels of bureaucracy and continued
disagreements between state and central governments will only increase risks for businesses looking to invest in India, keeping them on
the sidelines despite efforts to liberalise the Indian market. Moreover, given that around a fifth of FDI inflows into India are into sensitive
sectors such as pharmaceuticals and computer technology, we note that disagreements between governments could pose further
downside risks to India's attractiveness.
Business Environment 29
Table: BMI Business And Operation Risk Ratings 30
Institutions 31
Infrastructure 32
Table: BMI Legal Framework Rating 32
Table: Labour Force Quality 33
Market Orientation 34
Table: Top Export Destinations 35
Operational Risk 36
Chapter 5: Key Sectors 39
Defence 39
table: Defence Expenditure, 2010-2017 40
Freight Transport 43
tab le: Air Freight , 2011-2018 44
tab le: Rai l Freight , 2011-2018 45
tab le: Maritim e Freight , 2011-2018 46
Other Key Sectors 47
table: Oil and Gas Sector Key Indicators 47
tab le: Pharma Sector Key Indicators 47
table: Infrastructure Sector Key Indicators 47
table: Telecoms Sector Key Indicators 48
table: Food and Drink Sector Key Indicators 48
table: Autos Sector Key Indicators 48
Chapter 6: BMI Global Assumptions 49
Global Outlook 49
Chinese Economy Under Pressure 49
Table: Global Assumptions 49
Tab le: Develop ed Stat es, Real GDP Growt H, % 50
Tab le: Em ergi ng Mark ets , Real GDP Growth , % 51

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