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India Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

The Indian government led by the Bharatiya Janata Party (BJP)has initiated various reforms in its first two years in office, and it willcontinue to enact incremental rather than big bang reforms over thecoming years. That said, the lack of majority in the Rajya Sabha,India's 245-seat upper house, will remain a hurdle to the implementationof large-scale reforms. State elections, which will continue totake place over the coming years, will determine whether the BJPwill attain an upper house majority by the time its term ends in May2019.We remain broadly constructive on the Indian economy, and it willremain the fastest growing major economy in Asia owing to thegovernment's pro-business initiatives and accommodative monetarypolicy by the central bank. We expect the country's manufacturingand services sectors to continue to perform strongly, and we maintainour FY2016/17 (April-March) and FY2017/18 real GDP growthforecast of 7.2% and 6.9%, respectively. However, the economy isstill facing ongoing challenges from weak private investment in theinfrastructure sector and external headwinds.

The Reserve Bank of India (RBI) held its repurchase (repo) rateunchanged at 6.50% during its June 7 monetary policy meeting,and we forecast that the central bank will cut its benchmark policyrate by an additional 25 basis points (bps) to 6.25% by the end ofFY2016/17 in a bid to provide continued support to the economy.The RBI remained dovish, and will continue to seek to improve thetransmission mechanism. Subdued inflation in FY2016/17 will providesufficient room for a reduction in the repo rate.The Indian government delivered its FY2016/17 union budget onFebruary 29, sticking to its fiscal deficit targets of 3.5% of GDP inFY2016/17 and 3.0% in FY2017/18, which we believe is positivefor macro-stability. That said, we forecast the central government'sfiscal deficit as a share of GDP to come in at 3.7% in FY2016/17,as headwinds to revenue expansion and expenditure reduction arelikely to persist.The Indian rupee will depreciate gradually against the US dollar overthe coming years, and we forecast the unit to average INR68.25/USDin 2016 and INR69.50/USD in 2017. The RBI will continue to allowthe currency to weaken in order to keep the currency competitiveagainst its regional peers. However, rupee weakness will be cappedamid continued foreign direct investment owing to an improvementin business environment.Major Forecast ChangesWe revised our FY2016/17 current account deficit forecast to 1.6%of GDP (from 1.3% previously) as India's external accounts will faceheadwinds from weak global demand and rising global oil prices.

Table Of Contents

India Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Still Asia's Outperformer, But Headwinds Will Persist.8
The Indian economy expanded by 7.6% in real terms in FY2015/16 (April-March) from 7.2% in the previous year, and we maintain our
view that the South Asian economy will be the fastest growing major economy over the coming years. Nevertheless, we also retain
our FY2016/17 real GDP growth forecast of 7.2%, and highlight that the economy is still facing ongoing challenges from weak private
investment and external headwinds.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS.9
TABLE: PRIVATE CONSUMPTION FORECASTS..10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS.10
TABLE: NET EXPORTS FORECASTS..10
Fiscal Policy And Public Debt Outlook 11
Key Challenges To Constructive Fiscal Outlook..11
Although India's fiscal profile has improved slightly since the introduction of its FY2016/17 Union Budget, we maintain our forecast for a
3.7% budget deficit as a proportion of GDP, which would be higher than the government's target of 3.5%. The modest improvement in
India's growth outlook for FY2016/17 will not be sufficient to mitigate other fiscal risks stemming from possible expenditure overruns in
bank recapitalisation and public sector payrolls. That said, the budget does mark a marginal improvement in terms of quality of spending
and fiscal consolidation. On a longer time horizon, we believe that the government will establish a nation-wide GST to boost indirect tax
revenues, but its implementation will only take place near FY2018/19, missing the April 2017 target.
TABLE: SEVENTH PAY COMMISSION: SUMMARY OF FINANCIAL IMPACT11
Structural Fiscal Position. 13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES..13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..13
External Trade And Investment Outlook. 14
FDI Supports External Finances Amid Risks To Trade Balance.14
We have revised down our current account deficit forecast for India to 1.6% from 1.3% of GDP for FY2016/17 as a result of the country's
weak trade outlook. Foreign direct investment growth, on the other hand, will remain resilient amid ongoing policy reforms. Net FDI
inflows will thus continue to fund India's current account deficits.
Outlook On External Position. 15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS15
TABLE: MAIN EXPORT AND IMPORT PARTNERS..16
TABLE: MAIN EXPORTS AND IMPORTS16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..16
Monetary Policy.. 17
Further Easing Still Likely Despite June Hold.17
Although the RBI held its benchmark repo rate steady at 6.50% at its June 7 monetary policy meeting, we maintain our forecast for the
central bank to pursue further easing and reduce its key policy rate by 25bps to 6.25% by end-FY2016/17 (April-March). We believe that
a modest inflation outlook over the coming months will provide room for the central bank to maintain an accommodative monetary policy
stance as it attempts to provide support to the economy.
Monetary Policy Framework 18
TABLE: MONETARY POLICY FORECASTS.18
4 www.bmiresearch.com Business Monitor International Ltd
INDIA Q4 2016
Currency Forecast. 19
INR: Depreciation To Be Gradual Despite Global Uncertainty..19
Over the long term, the Indian rupee will depreciate gradually against the US dollar as the RBI seeks to keep the rupee competitive, and
we maintain our forecast for the currency to average INR68.25/USD in 2016 and INR69.50/USD in 2017. However, weakness will be
capped amid continued foreign direct investment owing to an improving business environment.
TABLE: BMI CURRENCY FORECAST..19
Chapter 2: 10-Year Forecast. 23
The Indian Economy To 2025. 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 maintain a sanguine, if cautious, long-term growth outlook with a 10-year average real GDP growth rate of
6.7%.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.23
Chapter 3: Political Outlook. 27
SWOT Analysis 27
BMI Political Risk Index. 27
Domestic Politics.. 28
GST Reforms Likely To Get Under Way While Local Election Fever Heats Up..28
The ruling BJP is well-positioned to grow its support base in Uttar Pradesh ahead of 2017 state elections. Nonetheless, its socially
targeted campaign risks alienating other supporters across the state's diverse electorate. At the federal level, the BJP is likely to secure
the passage of the GST Constitution Amendment Bill in the monsoon session of parliament. This will be a major boon for the BJP's
ongoing economic reform drive, but full implementation of the GST system by the April 2017 target is unlikely.
Long-Term Political Outlook.. 29
Gradual Reform To Prevail Over The Coming Decade..29
India's new government has the strongest mandate in 30 years to transform the economic and political landscape, and make the country
more prosperous and business-friendly. The main challenges will be tackling obstructionism from regional governments and traditional
interest groups, and ensuring that future economic growth consolidates a politically moderate middle class.
Chapter 4: Operational Risk. 33
SWOT Analysis 33
Operational Risk Index.. 33
Operational Risk. 34
TABLE: OPERATIONAL RISK34
Market Size And Utilities 35
TABLE: ASIA - MARKET SIZE AND UTILITIES RISK..36
Labour Costs 39
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 40
Chapter 5: BMI Global Macro Outlook 43
Global Macro Outlook. 43
Brexit Risk Casts A Long Shadow..43
TABLE: GLOBAL ASSUMPTIONS..43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..45
TABLE: MACROECONOMIC DATA and FORECASTS.47

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