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India Country Risk Report Q2 2016

India Country Risk Report Q2 2016

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 Changes

We maintained our major forecasts as highlighted in our previousQ116 Country Risk Report and we highlight the key risks to ouroutlook below.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth Outlook Facing Mounting Challenges
India's real GDP expanded by 7.4% y-o-y in Q2FY2015/16, accelerating from a rate of 7.0% 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 7.3%, 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 AHEAD
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Potential Government Wage Increase A Negative For Fiscal Consolidation
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 5.0%, thereby reducing room for the central bank to enact additional rate cuts.
TABLE: FINANCIAL IMPACT OF SEVENTH PAY COMMISSION RECOMMENDATIONS
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Monetary Policy
RBI To Keep Rates Accommodative
Following the decision by the RBI to keep its repo rate steady at 6.75% 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 6.25% in FY2016/17.
Monetary Policy Framework
Currency Forecast
INR: Modest Depreciation In 2016
The Indian rupee will depreciate modestly against the US dollar over the coming years, and we forecast the unit to average INR68.25/
USD in 2016 and INR69.50/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 FORECAST
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Chapter 2: 10-Year Forecast
The Indian Economy To 2025
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.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
BJP's Bihar Loss Negative For Reforms And Equities
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 OVERVIEW
Long-Term Political Outlook
Gradual Reform To Prevail Over The Coming Decade
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
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: INDIA – MACROECONOMIC DATA & FORECASTS

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