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India Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

The Indian government led by the Bharatiya Janata Party (BJP) hasinitiated various reforms in its first year in office, and it will continueto enact incremental rather than big bang reforms over the comingyears. That said, the lack of majority in the Rajya Sabha, India's245-seat upper house, will remain a hurdle to the implementationof large-scale reforms. State elections, which will continue to takeplace over the coming years, will determine whether the BJP willattain an upper house majority.We remain broadly constructive on the Indian economy, and it willbecome 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 performing strongly. However,weakening agricultural growth and slowing reform momentum,notably in the infrastructure sector, will weigh on overall economicgrowth, and we maintain our FY2015/16 (April-March) real GDPgrowth forecast to 7.3%.The Reserve Bank of India (RBI) kept its repurchase (repo) rateunchanged at 6.75% at its December monetary policy meeting, andwe expect the central bank to keep its benchmark policy rate steadyfor the remainder of FY2015/16 (April-March) as its shifts its focustowards improving the transmission of past rate cuts. The RBI leftthe door open for further easing, and given that medium-term inflationis likely to remain subdued in FY2016/17 (coming in below theRBI's target of 5.0%), we forecast another 50 basis points worth ofinterest rate cuts in FY2016/17 to 6.25%.We expect the Indian government to eventually implement the goodsand services tax (GST) system over the coming years, but the proposedimplementation date of April 2016 is an optimistic one. Even ifthe GST Constitution Amendment Bill is passed by the upper house,ratification by at least half of the 29 legislative state assemblies islikely to be a time consuming process. Meanwhile, the proposal bythe Seventh Pay Commission to hike the compensation of Indiangovernment employees and pensioners will negatively impact thegovernment's fiscal consolidation plans.The Indian rupee will depreciate gradually against the US dollar overthe coming years, and we forecast the unit to average INR68.25/USD in 2016 and INR69.50/USD in 2017. The RBI will continue toallow the currency to weaken in order to keep the currency competitiveagainst its regional peers. However, major rupee weakness isunlikely as continued economic growth and positive real interestrates will lend support to the currency.Major Forecast ChangesWe maintained our major forecasts as highlighted in our previousQ116 Country Risk Report and we highlight the key risks to ouroutlook below.

Table Of Contents

India Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth Outlook Facing Mounting Challenges8
India's real GDP expanded by 74% y-o-y in Q2FY2015/16, accelerating from a rate of 70% y-o-y in the previous quarter, as the
manufacturing and power sectors registered strong growth Although we maintain our FY2015/16 (April-March) real GDP growth
forecast of 73%, the sluggish growth prints of the agriculture and construction sectors suggest that the Indian economy continues to
face multiple challenges
TABLE: MANUFACTURING AND UTILITIES POWERING AHEAD8
GDP By Expenditure Outlook 10
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS11
TABLE: NET EXPORTS FORECASTS11
Fiscal Policy And Public Debt Outlook 11
Potential Government Wage Increase A Negative For Fiscal Consolidation11
The proposal by the Seventh Pay Commission to hike the compensation of Indian government employees and pensioners will
negatively impact the country's fiscal consolidation plans In this case, medium-term inflation would likely head higher, coming in above
the RBI's FY2016/17 headline inflation target of 50%, thereby reducing room for the central bank to enact additional rate cuts
TABLE: FINANCIAL IMPACT OF SEVENTH PAY COMMISSION RECOMMENDATIONS 12
Structural Fiscal Position 13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES13
Monetary Policy 14
RBI To Keep Rates Accommodative14
Following the decision by the RBI to keep its repo rate steady at 675% at its December monetary policy meeting, we maintain our
forecast that the central bank will remain on hold for the rest of FY2015/16 (April-March) given the potential for inflation to surprise on
the upside over the coming months As inflation risks subside in FY2016/17, we expect the RBI to reduce its benchmark policy rate by
50bps to 625% in FY2016/17
Monetary Policy Framework 15
Currency Forecast 16
INR: Modest Depreciation In 201616
The Indian rupee will depreciate modestly against the US dollar over the coming years, and we forecast the unit to average INR6825/
USD in 2016 and INR6950/USD in 2017 Amid mounting external headwinds, the RBI will seek to keep the currency competitive
against its regional peers However, positive real interest rates and efforts by government to attract FDI will provide support to the INR,
limiting any potential weakness
TABLE: BMI CURRENCY FORECAST16
Outlook On External Position 18
TABLE: MAIN EXPORT AND IMPORT PARTNERS18
TABLE: MAIN EXPORTS AND IMPORTS19
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE19
Chapter 2: 10-Year Forecast 21
The Indian Economy To 2025 21
Will Indian Growth Live Up To Expectations?21
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
TABLE: LONG-TERM MACROECONOMIC FORECASTS21
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Domestic Politics 26
BJP's Bihar Loss Negative For Reforms And Equities26
The BJP's heavy loss in the Bihar legislative assembly elections suggests that it will be increasingly difficult for the ruling party to
attain a majority in the upper house The BJP will continue to struggle to pass big bang structural reforms as the opposition parties
grow stronger Meanwhile, we expect Indian equities to underperform amid the BJP's sliding political fortunes and expensive
valuations
TABLE: POLITICAL OVERVIEW26
Long-Term Political Outlook 28
Gradual Reform To Prevail Over The Coming Decade28
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
Trade Procedures And Governance 35
TABLE: TRADE PROCEDURES AND GOVERNANCE RISK35
TABLE: IMPORT AND EXPORT DOCUMENTS36
TABLE: TRADE PROCEDURES BREAKDOWN36
Vulnerability To Crime 37
Chapter 5: BMI Global Macro Outlook 41
Global Macro Outlook 41
Unfinished Business In 201641
TABLE: GLOBAL ASSUMPTIONS41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %42
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %43
TABLE: INDIA - MACROECONOMIC DATA and FORECASTS45

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