Is India bouncing back?

The resounding victory for Narendra Modi’s BJP-led National Democratic Alliance in the world’s largest democratic elections during April and May handed the new prime minister a strong mandate to carry out the reforms needed to put India’s economy and investor potential back on track.

And ECR’s India contributors, comprising 36 economists and other country risk experts, seem to agree. Its country-risk score improved in anticipation of the outcome, ending its downward trend.

Ending the slide

India’s score had been sliding for several years as economists and other country-risk experts doubted its creditworthiness, with the withdrawal of fiscal stimulus and rising inflation forcing economic growth down below 5% per annum, and foreign-exchange reserves under pressure from a widening external deficit and insufficient inward investment.

Those fears reverberated through the FX markets when the rupee was one of several large EM currencies undermined by capital outflows after the news the US Federal Reserve intended to taper its bond-purchase quantitative-easing programme, swirling liquidity around the global economy.

Emergency measures introduced by India’s previous administration, including a ban on gold imports, helped stem the tide. From here on, though, much will depend on the efficacy of the new government’s programme for dealing with the problems quenching India’s growth potential and draining its fiscal resources.

The new administration will also need to counteract monetary tightening anticipated from the Reserve Bank of India, as it aims to thwart inflationary pressure stemming partly from rural wage hikes.

Improvements to the regulatory and policymaking environment, presently scoring just 4.4 out of 10 in the survey, are long overdue, as is a stronger push to tackle corruption – the lowest scoring of all the 15 risk indicators on a miserable tally of 2.9.

“India’s markets have rallied strongly over the last three months under the ‘Modi mania’, says ABN Amro senior economist Maritza Cabezas.

“There is positive sentiment that the government will take a series of steps to rebuild investor confidence while keeping fiscal consolidation firmly in sight.”

More clarity will be provided when the government’s programme is unveiled next month. Investors will be watching closely for signs of land, labour and tax reforms.

India’s political risks, meanwhile, remain high – indeed worse than China’s and Brazil’s – while its infrastructure and government-finances scores notching up less than half the available points are also cause for concern.

Ranking 63rd in ECR’s survey, having climbed two places in the global rankings this year, India has at least avoided the ignominy of falling into the fourth of ECR’s five tiers, which would surely have seen it lose its credit rating, with S&P poised for a downgrade.

Where India heads now will become clearer when ECR releases its next quarterly results round-up in July, but on current trends it looks likely to swap places with Russia in the rankings, if the fight back continues. 

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