Analysts plan to downgrade the country as the crisis escalates.
A typical Kumbh Mela festival crowd
India’s country risk score rebounded in the first months of the year – along with most emerging markets (EMs) – as the global economy revved-up and an end to the Covid crisis was in sight.
Most of India’s economic risk factors showed some quarterly improvement, despite remaining lower on a year-on-year basis. The political and structural risk indicators were also mostly upgraded.
However, India’s improvement was slight in comparison with China and Russia, leaving its five-year trend negative. India’s 10-year trend is also worse than those for China, Russia, South Africa, Turkey, Indonesia and Nigeria:
At 84th in the global risk rankings, India is rated a similar risk to Jordan and the Philippines, according to Euromoney’s survey, with the country down 17 places in comparison with its year-earlier level.
Negativity is swirling around the investor environment as the coronavirus crisis escalates out of control, putting the economy and healthcare system in jeopardy.
There are also likely to be political ramifications down the line. Prime minister Narendra Modi is under fire for allowing mass gatherings, including the Hindu religious festival Kumbh Mela – attracting millions of people – and political rallies, with key elections being held this year.
Facebook postings, apparently mistakenly removed and subsequently restored, are calling for his resignation.
This week, the Covid-19 caseload has increased above 300,000 per day and is expected to peak in a couple of weeks – at an estimated 500,000 per day – with deaths to the disease already likely to be far higher than officially reported.
Euromoney’s survey contributors have been asked to rescore the risks, as states and cities are announcing localized lockdowns. Subscribers will be able to see the results of this in due course.
Many of the experts are expecting risk measures to alter, with some reduction in scores for investment-related factors, especially since the government has limited fiscal space to address the economic and social consequences.
The Reserve Bank of India (the central bank) has issued its latest monthly bulletin, stating that activity indicators largely remained resilient in March and grew beyond pre-pandemic levels.
However, it also warned that “the resurgence in Covid-19, if not contained in time, risks protracted restrictions and disruptions in supply chains with consequent inflationary pressures”.
The local media, too, is warning that India’s double-digit economic growth, which is so critical for its ongoing development, is in doubt, despite the IMF only recently predicting a 12.5% real-terms expansion for 2021 after last year’s 8% contraction.
Covid variants are spreading unchecked, as India is sequencing only 1% of the positive sample tests- Alessandro Rebucci, Johns Hopkins University
India’s thriving metropolises of Delhi and Mumbai are temporarily devoid of life, with shops closed, and although a national lockdown has been avoided so far, retail data is indicative of another big hit to an economy that is already reeling from global foreign travel restrictions.
Prominent survey contributor Alessandro Rebucci, an associate professor at Johns Hopkins University Carey Business School, believes that India’s broader fundamentals are stable.
However, he points out that India faces two internal challenges: one is the Covid-19 resurgence; the other is the funding that the government needs to fight against it.
“Despite housing vaccine manufacturing capacity to supply a large share of the world’s needs, India has failed to roll out an effecting campaign for its 1.4 billion citizens,” he says.
“Covid variants are spreading unchecked, as India is sequencing only 1% of the positive sample tests, compared to 4% in the US and 8% in the UK.”
This new Covid wave will threaten what would be otherwise a bright economic outlook. Moreover, with a budget deficit projected to exceed 10% of GDP in 2021, the government’s funding needs “remain manageable but are conspicuous”, Rebucci points out.
“Recent auction outcomes showed that the domestic government bond market is jittery,” he adds. “For the time being, India’s central bank has managed to lend a helping hand to the struggling treasury by injecting another large dose of quantitative easing in the form of purchases of long-term government liabilities.
“However, with 5% inflation and rising US interest rates, this delicate equilibrium could be unsettled by a sudden tightening of global financial conditions, ultimately impacting funding costs in all emerging markets, including moderately vulnerable ones like India.”
Indeed, with India facing a human catastrophe, there are reasons for investors to remain cautious over its short-term prospects. This is despite what many experts would attest to is a more favourable longer-term outlook.