India

A difficult and slow recovery

MEDIUM 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

Last updated in July 2021.

Swipe to view more

GDP	USD2623bn (World ranking 6, World Bank 2020)
Population	1380mn (World ranking 2, World Bank 2020)
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).

useful description of image if informative and not decoration only.

Deep slump, slow recovery

The Indian economy is a decent performer among emerging economies, with +6.2% growth on average over the past 30 years and +6.7% over the past 10 years (roughly in line with emerging Asia). However, the Covid-19 crisis has hit India badly, with the economy already in a vulnerable state at the end of 2019. The resulting contraction in GDP was among the deepest in the Asia-Pacific region. A partial recovery was thereafter delayed by a renewed outbreak of Covid-19 (albeit with a smaller economic impact than in 2020). India could be lagging the global and regional economic recovery due to the difficult management of the pandemic domestically, its comparatively smaller exposure to exports and more limited room for domestic policy support. Looking at insolvencies, data history is relatively limited, but shows a decline from 2020 levels. A catchup could occur as the economy normalizes.

Despite the relatively limited room for maneuvering, 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, consisting of direct spending measures, reinforced social welfare towards the informal labor force (nearly 90% of the total workforce), expansion of tax holidays, relaxation of credit conditions channeled through banks etc. On the monetary side, the Reserve Bank of India (RBI) has injected liquidity amounting to at least c.5% of GDP and embarked on a QE-like monetary policy. However, the aftermath of these support measures needs watching, given the fragile recovery and relatively strong inflation. On the external side, short-term developments are not particularly promising, but trade and investment diversion in the medium to long run (as a result of the US-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 provide opportunities for Indian exporters.

Structural vulnerabilities, both domestic and external

Overall, indicators show that the short-term financing risk is sensitive. Indicators that need monitoring in the short run are (i) public finances, with a very large albeit declining fiscal deficit; (ii) the financial sector and non-performing assets and (iii) the current account balance (likely to fall back into deficit).

We are particularly wary of the leeway for and efficiency of policy stimulus on both the fiscal and monetary sides. Public debt already shot up with the Covid-19 crisis and seems to be stabilizing at the high level of around 90% of GDP (vs. c.75% before the pandemic). The financial sector is constrained by non-performing assets, with the system-wide gross non-performing-loans ratio standing at 7.5% in March 2021 (among the highest in Asia-Pacific) and likely to rise as the economy normalizes. Banks are in need of reinforcing their capital and liquidity positions against potential stress. Savings are too low compared to investment, resulting in a current account deficit (albeit a temporary surplus in 2020 as a result of plummeting imports).

Business environment and political developments

India does not rank particularly well in the 2020 World Bank Doing Business survey (63rd), but the business environment is slowly improving. The progress particularly comes from improvements in the processes of dealing with construction permits, resolving insolvency, paying taxes, trading across borders and getting credit. In the past years, the government has implemented substantial structural reforms to liberalize agricultural and labor laws. Plans to open up more sectors of the economy to private firms by privatizing or consolidating state-owned enterprises are likely. Liberalizing land-acquisition laws will also be an area of attention to improve the business environment. We would also keep an eye on the risk of new trade barriers in the context of the “self-reliant India” campaign.

The ruling Bharatiya Janata Party (BJP) is likely to stay in power until the end of its term in 2024. Narendra Modi, prime minister since 2014, should remain the dominant figure in the government. Given the lack of an effective political opposition, the stability of this government is unlikely to be rattled by discontent with its handling of the Covid-19 pandemic. We would watch out for state elections in 2022 as a disappointing result for the government could hinder its ability to pass further structural reforms.

Trade structure by destination/origin

(% of total, 2020)

Exports	Rank	Imports
United States 17.9%	1	17.3% China
China 6.9%	2	7.5% United States
United Arab Emirates 6.5%	3	6.5% United Arab Emirates
Hong-Kong, China 3.5%	4	4.8% Saudi Arabia
Singapore 3.0%	5	4.4% Iraq

Trade structure by product

(% of total, 2020)

Exports	Rank	Imports
Petroleum, petroleum products and related materials 9.7%	1	19.5% Petroleum, petroleum products and related materials
Non metallic mineral manufactures, n.e.s. 7.4%	2	6.4% Electrical machinery, apparatus and appliances, n.e.s.
Medicinal and pharmaceutical products 7.3%	3	5.7% Gold, non-monetary (excluding gold ores and concentrates)
Organic chemicals 5.8%	4	5.2% Office machines and automatic data processing machines
Textile yarn and related products 5.5%	5	5.1% Non metallic mineral manufactures, n.e.s.

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.