India: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|B||The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.|
Growth will again be driven by consumption
Activity is likely to remain vigorous during the fiscal year 2016/17. The Indian economy will continue to benefit from the low level of commodity prices and the effects of the initial reforms Narendra Modi’s government has undertaken, aimed at promoting the Indian manufacturing sector, attracting FDI and reducing the constraints that are weighing on the economy.
Household consumption, the main driving force of activity, will probably remain buoyant. It will benefit from an increase in wages paid to federal civil servants and the improvement in the financial integration of the lowest-income households. In addition, in 2016-2017, agricultural production will be boosted by above average monsoon rains, which should maintain low prices and, thus, support consumption. Furthermore, despite the accommodating monetary policy conducted by the central bank (RBI), with the key interest rate lowered by 150 basis points to 6.5% since January 2015, private investment struggle to take off. Indeed, RBI’s reform encouraging banks to record their non-performing loans (between 7% and 8% of total outstanding credit) on their balance sheet with a 100% provisioning by March 2017, as well as overcapacity will weigh on investment. However, the infrastructure development program, particularly in the areas of roads, railways and electricity would enable important public investments. Nevertheless, the budgetary constraints and the delays relating to the land reform will slow the progress of these projects. Moreover, exports are likely to continue to suffer from a lack of competitiveness and from the sluggishness of global demand, even if the services sector, especially the high-technology, will continue to post good performances. Inflation will remain under control in 2016-2017, thanks in particular to the moroseness of commodity prices, first and foremost food, oil and gold.
Public finances remain fragile, but external accounts are under control
Despite the determination of the authorities aided by low energy prices reducing the burden of subsidies, the fiscal deficit and the public debt remain significant. Authorities recapitalized public banks (75% of banking assets) up to 3.4 billion dollars in July 2016, but the pursuit of the banks’ balance sheet cleaning desired by the new governor of RBI, Urjit Patel, may take an additional effort. The potential implementation in 2017 of a federal VAT, substituting to a pile of local taxes, may require compensations from the federal budget to the benefit of aggrieved federated states. In this context, the sale of frequency to telecom operators and further privatizations could help control the deficit. The current-account is expected to remain under control despite the slowdown in exports. Indeed, the low level of commodity prices should make it possible to keep a lid on imports cost. Helped by comfortable foreign exchange reserves (almost 9 months of imports in 2016) and the rise in FDI and portfolio investments fostered by regulations easing, this should contribute to maintain the stability of the rupee.
Conflictual relations with Pakistan and fizzling reforms
Following the general elections in May 2014 which gave a resounding victory to the BJP (Bharatiya Janata Party), N. Modi was appointed prime minister and his party holds the absolute majority in the lower house of parliament. Elections that have been held in several important states have initially confirmed the BJP’s popularity, but the party has subsequently had several electoral setbacks, notably in Delhi and in the state of Bihar, and is threatened in Gujarat. The main opposition party, the National Congress, continues to dominate the upper chamber, delaying the reforms expected by the business community, which reacted very favorably to the election of Mr. Modi.
The relationship with Pakistan remains tense due to the Kashmir issue, a region disputed by the two countries. Violent confrontations between demonstrators and the police in the Indian Kashmir have stopped discussions between the two governments, already undermined by the attack of an Indian base, in the state of Punjab, in January 2016. Finally, despite the undertaken reforms, with, in particular, the modernization of bankruptcy law and the forthcoming introduction of a federal VAT, the business environment will continue to suffer from persistent gaps. The opening to FDI in pharmaceuticals, civil aviation and single brand retail encounters strong difficulties of application. Some key measures promised by the Prime Minister, such as the relaxation of rules on land expropriation and the labor market, are blocked by the Parliament.