India Country Risk Report & Analysis

A difficult and slow recovery

SENSITIVE RISK for entreprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD2875bn (World ranking 5, World Bank 2019)
Population	1366mn (World ranking 2, World Bank 2019)
Form of state	Federal Republic
Head of government	Narendra Modi (PM)
Next elections	2022, presidential

Stable democracy, with peaceful changes of government
Large internal market, providing some insulation from global business cycle
Successful diversification into manufacturing (motor vehicles) and services (including call centres, IT and biotechnology)
High annual GDP growth
Low external debt relative to earnings and repayment capacity
Strong foreign exchange reserves

Growing financial risk, with deterioration of balance sheets for banks and non-bank financial institutions amid the Covid-19 crisis.
The Kashmir region remains volatile and a source of potential conflict. India-China relations have also deteriorated recently due to border disputes.
The political system tends to engender coalition governments that lack the ability to push through economic reforms. Political opposition and nationwide protests against the Citizenship Amendment Act emerged in late 2019, and have dissipated for now amid the Covid-19 pandemic.
Poverty remains pervasive and income distribution uneven.
Structural weaknesses include inadequate infrastructure, current and fiscal account deficits and state involvement that crowds out private sector initiatives in some sectors.
Weak structural business environment (though improving)
Vulnerable to natural disasters (including tsunamis, droughts, floods and earthquakes).

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Deep slump in 2020, slow recovery

The Covid-19 pandemic has hit India badly, with the economy already in a vulnerable state at the end of 2019. We expect GDP to contract by -10.2% in fiscal year (FY) 2020-21 (ending 31 March 2021), followed by a partial recovery of +9.7% in FY2021-22. India could be among the laggards in the economic recovery due to the difficult management of the pandemic domestically, its comparatively small exposure to the global recovery and more limited room for domestic stimulus.

The first case of Covid-19 was reported in India in late January 2020 and the country went into a strict nationwide lockdown on 24 March. It was eased in May, with regional extensions and containment zones still in force in autumn. GDP contracted by -23.9% y/y in Q2 2020, and the fact that the virus is still circulating means that the recovery will be slow. Uncertainties about the sanitary situations is negatively impacting household and business confidence. Externally, India’s relatively smaller exposure to trade means that the economy will not particularly benefit from the earlier recovery of the Chinese economy.

Despite the relatively limited room for manoeuvering, policy measures have been put in place to dampen the negative impact of the Covid-19 crisis. Fiscal support amounting to around 10% of GDP has been announced since May 2020. Direct spending measures such as cash transfers and wage support have been implemented. Social welfare towards India’s informal labor force – nearly 90% of the total workforce – has been reinforced. Measures such as the expansion of tax holidays as well as the relaxation of credit conditions channeled through banks – a result of the monetary stimulus and regulatory easing – are aimed at supporting businesses. On the monetary side, the Reserve Bank of India (RBI) has injected liquidity amounting to c.5% of GDP and embarked on a QE-like monetary policy.

Risks are on the downside

Risks to the outlook are on the downside. In the near term, besides the risk of an even more serious Covid-19 outbreak, we are wary of the leeway for and efficiency of policy stimulus. Public debt is expected to rise towards 75% of GDP in 2020. While already having a negative real interest rate, the RBI may be forced to tighten monetary policy in the coming year. In particular, 2022 could be a tricky time as India has among the highest amounts in EMs of debt maturing that year. The financial sector is constrained by high non-performing assets, with the system-wide gross non-performing loans ratio standing at 9.1% in FY2018-19 (the highest among major economies in Asia-Pacific). Savings are too low compared to investment, resulting in a current account deficit (though this is expected to narrow in 2020 as a result of plummeting imports).

On the positive side, lower oil prices are supportive to reduce the goods trade deficit and inflationary pressures, which should in turn help private consumption. Moreover, trade and investment diversion in the medium to long run (as a result of the U.S.-China trade spat and increasing costs in China) and the servitization of manufacturing and global trade (the delivery of a service component as an added value when providing products) could also provide opportunities for Indian exporters. - February 2021.

Trade structure by destination/origin

(% of total)

Exports	Rank	Imports
United States 16.8%	1	14.3% China
United Arab Emirates 9.1%	2	7.3% United States
China 5.3%	3	6.3% United Arab Emirates
Hong-Kong, China 3.6%	4	5.6% Saudi Arabia
Singapore 3.3%	5	4.6% Iraq

Trade structure by product

(% of total)

Exports	Rank	Imports
Mineral fuels, mineral oils, and related products 13.78%	1	31.88% Petroleum, petroleum products and related materials
Pearls, precious stones, precious metals 11.36%	2	12.3% Pearls, precious stones, precious metals
Machinery and mechanical appliances 6.58%	3	10.62% Electrical machinery and equipment
Organic chemicals 5.64%	4	9.29% Machinery and mechanical appliances
Motor vehicles 5.39%	5	4.29% Organic chemicals

DSO in India is 67 days, late payments are not regulated and ownership protection may be difficult to enforce.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

The court system is complex while extensive delays and costs make legal action difficult. Accelerated proceedings are not available for undisputed debts and foreign debt judgments would be enforced with difficulty.

A new insolvency regulation provides a framework for debt restructuring, priority rules, time frames and clawback, but in practice, once the debtor is insolvent, chances of recovery are virtually impossible.