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India Country Risk Report Q2 2018

India Country Risk Report Q2 2018

Executive Summary

Core Views

The Indian economy has broadly benefitted from the reforms under - taken by the government since it took office in May 2014. We expect the administration led by Prime Minister Narendra Modi to continue to enact incremental reforms over the coming years, which should be positive for the economy.
India's real GDP growth rebounded to 6.3% y-o-y in Q2FY2017/18, ending a five-quarter downtrend. We continue to expect the economy to slowly recover over the coming quarters. We forecast real GDP growth to come in at 6.4% in FY2017/18 as the economy benefits from the government's optimisation of the GST system and policies to support state banks and the infrastructure sector. The Reserve Bank fo India (RBI)'s stance will likely stay unchanged over the coming months as inflationary pressures rise amid a slight recovery in growth.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth To Trend Higher As GST Disruptions Fade
India's real GDP growth rebounded to 6.3% y-o-y in Q2FY2017/18, ending the five-quarter downtrend. We continue to expect the
economy to slowly recover over the coming quarters. We forecast real GDP growth to come in at 6.4% in FY2017/18 as the economy
benefits from the government's optimisation of the GST system and policies to support state banks and the infrastructure sector. The
RBI's stance will likely remain unchanged over the coming months as inflationary pressures rise amid a slight recovery in growth.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
RBI To Remain On Hold For The Rest Of FY2017/18
The Reserve Bank of India left its benchmark repo rate unchanged at 6.00% during its December 6 meeting. We continue to expect
interest rates to remain steady for the remainder of FY2017/18. The central bank is constrained by opposing goals of curbing rising
inflationary pressures, but also ensuring that the recent economy recovery since Q2FY2017/18 remains intact.
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
GST Optimisation To Help Spur Growth Acceleration
The GST Council's decision to reduce taxes on more commonly used goods and services demonstrates the government's commitment
to optimising the tax system in order to support growth. We continue to expect economic activity to pick up in H2FY2017/18 (April-
March).
TABLE: SELECT APPROVED GST REDUCTIONS–GST COUNCIL NOVEMBER 6 MEETING
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
Currency Forecast
INR: Short-Term Strength To Fizzle Out Over The Coming Months
We are revising our 2018 Indian rupee average forecast slightly stronger to INR65.00/USD from INR66.33/USD previously, following
the bullish technical break of resistance at the start of the year. That said, we still forecast minor weakness in spot terms over 2018 into
2019 due to the currency's overvaluation, declining India-US real yield differentials and the potential for fiscal slippage over the coming
quarters.
TABLE: CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Indian Economy To 2027
Will Indian Growth Live Up To Expectations?
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. With
this in mind, we maintain a sanguine, if cautious, long-term growth outlook with a 10-year average real GDP growth rate of 6.6%.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
BJP's Gujarat And Himachal Pradesh State Election Victories Suggest Still-Strong Popularity
The BJP's wins in both the Gujarat and Himachal Pradesh state legislative assembly elections in December 2017 indicate that the party
still enjoys strong support among voters. However, a narrowed victory margin in the key BJP-stronghold state of Gujarat suggests that
the ruling party could veer towards populist measures at the expense of economic reforms and fiscal consolidation in order to secure
victories in important states that it currently controls, such as Rajasthan and Madhya Pradesh.
TABLE: DECEMBER 2017 STATE ELECTIONS SEAT COUNT
TABLE: KEY STATES THAT ARE SET TO HAVE ELECTIONS IN 2018
Long-Term Political Outlook
Gradual Reform To Prevail Over The Coming Decade
India's 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
Operational Risk
TABLE: OPERATIONAL RISK
Conflict Risk
TABLE: MAIN ACTIVE TERRORIST GROUPS
TABLE: POLITICAL VIOLENCE RISK
TABLE: MAJOR CONFLICT FLASHPOINTS
TABLE: BUSINESS RESPONSE TO CONFLICT RISK
Transport Network
TABLE: ROAD RISKS
TABLE: RAIL RISKS
TABLE: PORTS AND INLAND WATERWAY RISKS
TABLE: AIR TRANSPORT RISKS
Chapter 5:BMI Global Macro Outlook
EM Growth To Accelerate In 2018 While DMs Plateau
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: INDIA – MACROECONOMIC DATA AND FORECASTS

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