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India Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 43 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 will continue to enact incremental rather than big-bang reforms over the coming years. That said, the lack of majority in the Rajya Sabha, India's 245-seat upper house, will remain a hurdle to the implementation of large-scale reforms. State elections, which will continue to take place over the coming years, will determine whether the BJP will attain an upper house majority by the time its term ends in May 2019. We remain broadly constructive on the Indian economy, and it will remain the fastest growing major economy in Asia owing to the government's pro-business initiatives and accommodative monetary policy by the central bank. We expect the country's manufacturing and services sectors to continue to perform strongly, and we maintain our FY2016/17 (April-March) and FY2017/18 real GDP growth forecast of 7.2% and 6.9%, respectively. However, the economy is still facing ongoing challenges from weak private investment in the infrastructure sector and external headwinds. The Reserve Bank of India (RBI) held its repurchase (repo) rate unchanged at 6.50% during its August 9 monetary policy meeting, and we forecast that the central bank will cut its benchmark policy rate by an additional 25bps to 6.25% by the end of FY2016/17 in a bid to provide continued support to the economy. The RBI remained dovish, and will continue to seek to improve the transmission mechanism. Subdued inflation in FY2016/17 will provide sufficient room for a reduction in the repo rate. The Indian government delivered its FY2016/17 union budget on February 29, sticking to its fiscal deficit targets of 3.5% of GDP in FY2016/17 and 3.0% in FY2017/18, which we believe is positive for macro-stability. That said, we forecast the central government's fiscal deficit as a share of GDP to come in at 3.7% in FY2016/17, as headwinds to revenue expansion and expenditure reduction are likely to persist. The Indian rupee will depreciate gradually against the US dollar over the coming years, and we forecast the unit to average INR66.80/USD in 2016 and INR68.00/USD in 2017. The RBI will continue to allow the currency to weaken in order to keep the currency competitive against that of its regional peers. However, rupee weakness will be capped amid continued foreign direct investment owing to an improvement in business environment. Major Forecast Changes We upgraded our forecasts for Indian rupee to average INR66.80/ USD in 2016 and INR68.00/USD in 2017. India's external outlook has improved, with a narrowing current account deficit reflecting savings gains from low oil prices. On the financial ledger, foreign direct investment inflows are set to grow amid improving business conditions and a favourable growth outlook. We believe that the rupee will continue to perform in terms of total returns while remaining on a long-term depreciatory trend, since inflation will remain above that of the US.

Table Of Contents

India Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
GDP Miss Highlights Ongoing Challenges...................................................................................................................................8
India's real GDP growth decelerated to 7.1% y-o-y in Q1 of FY2016/17 (quarter ending June 2016) from 7.9% y-o-y in Q4 of FY2015/16,
and missed Bloomberg consensus expectations for a 7.6% y-o-y expansion. We maintain our FY2016/17 (April-March) real GDP
growth forecast for 7.2% amid challenges from weak investment and external headwinds, and our expectations for government support
to decline. However, India's manufacturing and service sectors will remain resilient and will be key drivers of growth over the coming
quarters.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE : GOVERNMENT CONSUMPTION FORECASTS......................................................................................................................................10
TABLE : FIXED INVESTMENT FORECASTS.........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Procedural Budget Changes To Improve Fiscal Policy Administration..................................................................................11
We believe that the recent changes to India's budget process will have a small positive effect on the implementation of its fiscal policies.
The Union Budget presentation will be moved forward, creating more time for finalising plans before the start of the fiscal year, while
combining the railway and union budget and removing non-planned expenditures will streamline the overall budget. Though only
procedural, these changes reflect the government's commitment to streamlining fiscal policies.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
Outlook On External Position.................................................................................................................................. 13
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................14
TABLE : MAIN EXPORT AND IMPORT PARTNERS..............................................................................................................................................14
TABLE: MAIN EXPORTS AND IMPORTS...............................................................................................................................................................14
TABLE : CAPITAL and FINANCIAL ACCOUNT BALANCE........................................................................................................................................14
Monetary Policy........................................................................................................................................................ 15
Scope For Further Policy Easing.................................................................................................................................................15
Following a decline in headline consumer price inflation to 5.1% y-o-y in August, we maintain our forecast for the RBI to cut its policy
interest rate by 25bps to 6.25% by the end of FY2016/17 (April - March). Although a rally in Indian bonds also suggests that markets
are pricing in higher odds of further monetary policy easing in the near term, the RBI is unlikely to cut interest rates further in FY2017/18
due to higher inflation risks from possible public spending overruns.
Monetary Policy Framework.................................................................................................................................... 16
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................16
Currency Forecast.................................................................................................................................................... 17
INR: Spot Depreciation But Strength In Total Return Terms....................................................................................................17
We have revised our forecast for the Indian Rupee to average INR66.80/USD in 2016 and INR68.00/USD in 2017 (from INR68.25/USD
and INR69.50/USD previously). While we believe that the rupee will remain on a gradual depreciatory path over the medium term as
inflation remains above that of the US, high real GDP growth will allow the currency to strengthen in total return terms.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................17
Chapter 2: 10-Year Forecast................................................................................................................... 19
The Indian Economy To 2025.................................................................................................................................. 19
Will Indian Growth Live Up To Expectations?............................................................................................................................19
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. Keeping 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.....................................................................................................................................19
Chapter 3: Political Outlook................................................................................................................... 23
SWOT Analysis......................................................................................................................................................... 23
BMI Political Risk Index........................................................................................................................................... 23
Domestic Politics..................................................................................................................................................... 24
BJP Seeks Greater Influence In State-Level Politics.................................................................................................................24
The Bharatiya Janata Party (BJP) has embarked on extensive campaigns ahead of major state elections in Uttar Pradesh (UP) and
Punjab in 2017. 2018 elections in Gujarat and Karnataka will also serve as a barometer of the party's regional support after two years
in government. We believe that the BJP's campaigning will deliver some success in the upcoming local elections, but the party will still
remain a minority in India's Rajya Sabha (Upper House).
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................24
Foreign Policy .......................................................................................................................................................... 25
Uri Attack Raises The Risk Of Conflict.......................................................................................................................................25
The deadly attack on an Indian army camp in Kashmir, alleged to have been carried out by a terrorist group with support from the
Pakistani authorities, raises the risk of conflict between the two countries. We do not expect an explicit military response from New Delhi
but note that the risks are high as the rhetoric from the Indian authorities has been particularly forceful.
Long-Term Political Outlook................................................................................................................................... 26
Gradual Reform To Prevail Over The Coming Decade..............................................................................................................26
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................................................................................................................... 29
SWOT Analysis......................................................................................................................................................... 29
Operational Risk Index............................................................................................................................................ 29
Operational Risk....................................................................................................................................................... 30
TABLE: OPERATIONAL RISK.................................................................................................................................................................................30
Business Crime........................................................................................................................................................ 31
TABLE : BUSINESS RESPONSE TO RISK IN INDIA.............................................................................................................................................32
Government Intervention......................................................................................................................................... 35
TABLE: BUSINESS TAXES.....................................................................................................................................................................................36
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................37
Chapter 5: BMI Global Macro Outlook................................................................................................... 39
Global Macro Outlook.............................................................................................................................................. 39
Broad Recovery But Three Notes Of Caution.............................................................................................................................39
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................41
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................43

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