The latest economic forecasts confirmed India’s upbeat momentum as GDP growth is expected to rise from 7.3% last financial year (FY) to 7.5% in FY 2016/17, confirming its position of world’s fastest large emerging country. Fundamentals continue to improve driven by consumer demand, with lower inflation, allowing cuts in interest rates, a broadly stable rupee and a narrowed current account deficit fuelled by lower oil prices.

Impact on country risk

Despite robust economic data, the situation is not as rosy as it may appear. First and foremost, doubts remain about actual growth figures since the revision of the calculation method in 2015, as witnessed by permanently weak export and manufacturing performances. Moreover, credit supply and demand are weak as many private and public investments are delayed, notably in infrastructures, and weigh on the general economic activity and job creation. Banks are indeed burdened by constantly rising bad loans – many explained by political cronyism – to a heavily indebted corporate sector, particularly in steel and infrastructure sectors, which is translated into a deteriorating payment track record and a rising commercial risk. Though Delhi is aware of and worried about the poor financial state of dominating public banks, the planned small recapitalisation (USD 3.6 billion) is by far insufficient to clean up the sector, hence further fiscal efforts (together with a better governance) will be required in the future despite Delhi’s budget consolidation policy. Finally, the fundamental reform process is stalling due to the opposition faced by the ruling BJP within the Parliament’s upper house. Political hurdles are highlighted by the delayed goods and services tax and modernisation of land acquisition laws, and slow progress in the ‘Make in India’ manufacturing policy. Therefore, after a few electoral setbacks last year, future elections in mainly rural states are of utmost importance – albeit tricky – to the BJP to raise its chances of gaining a majority in the upper house, at the latest before Modi’s potential second PM mandate in 2019. In the new fiscal year, higher social and populist spending benefiting the countryside are budgeted while the government will continue its liberal and business-friendly programme. Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com