Core Views
The growth slowdown in India is now well under way, led by a downturn in the country’s investment cycle. Gross fixed capital formation expanded at a snail’s pace of 0.4% y-o-y in the last quarter of FY2010/11 (April-March) and we expect this soft patch to persist in the first half of FY2011/12. That said, India’s longer-term macro outlook remains one of the most favourable globally, owing to the country’s strong demographics, economic liberalisation and reliance on domestic demand drivers.
Headline inflation has proven stickier than expected, but we maintain our view that India’s tightening cycle has come to an end. Money supply and credit growth are on a downward trajectory, and food prices are likely to grind lower. With the Reserve Bank of India likely to become increasingly mindful of slower growth, we believe that it will keep the benchmark repo rate on hold at 7.50% in the coming quarters.
The government’s decision to hike fuel prices in recent months should send a positive signal to investors regarding its commitment to longterm fiscal consolidation. Nevertheless, we continue to believe that the central government’s 4.6% budget deficit is overly optimistic and caution that a sharper-than-anticipated economic slowdown could tempt policymakers to turn on the fiscal taps once more.
Major Forecast Changes
We trimmed our FY2011/12 real GDP forecast from 7.8% to 7.6% on our belief that weakness in investment is now spreading to consumption, which is a much more significant part of the economy.
Key Risks To Outlook
Downside Growth Risks From Spiralling Inflation: Should food prices and oil prices maintain their upward march, there is a risk that we could see additional monetary tightening, which would surely come at the expense of headline economic growth.
Upside Long-Term Growth Risks From Structural Reforms:
Should the government successfully embark on reforms – particularly to investment regulations in the retail and insurance sectors – we may see a sustained increase in foreign direct investment, boosting longer-term growth.
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Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risk To Outlook5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Assembly Elections: Could Have Been Worse For UPA
Recent assembly elections in the states of West Bengal, Tamil Nadu, Kerala, Assam and Puducherry provided mixed results for the ruling Indian National Congress and its allies, but given the recent corruption scandals that it has faced, the outcome could have been far worse
Table: India Political Overview9
Chapter 2: Economic Outlook 11
SWOT Analysis 11
BMI Economic Risk Ratings 11
Economic Activity I 12
BMI On The Ground: Key Takeaways
During our recent excursion to India, we met with key clients in the government, banks and corporates in order to gauge current sentiment towards Asia’s third largest economy
Economic Activity II 15
From Investment To Consumption Weakness
India’s growth slowdown is now well under way Moreover, weakness is spreading from investment to consumption which, in pure GDP accounting terms, is much more significant for economic growth
Table: ECONOMIC ACTIVITY16
Monetary Policy 17
RBI To Stay Put Despite Diesel Price Hike
Despite reasonable concerns that India’s decision to raise diesel prices could put upward pressure on headline prices, we view the announcement as decidedly positive for the country’s long-term fiscal dynamics and inflation outlook
Table: MONETARY POLICY17
Balance Of Payments 18
Further Improvements Ahead
India’s balance of payments position is likely to improve further in FY2011/12 on the back of a narrowing trade shortfall, robust remittances and a recovery in net foreign investment
Table: CURRENT ACCOUNT18
Debt Policy 20
Should We Be Worried About Public Debt?
India’s fiscal-debt dynamics are, at face value, one of the weakest in emerging markets and a major reason behind the country’s relatively high interest rates
Table: FISCAL POLICY22
Chapter 3: 10-Year Forecast 25
The Indian Economy To 2020 25
Red-Hot Industry To Fuel Growth
Contrary to trends expected to play out across much of the region, we believe Indian industry will gain in economic importance over the coming decade, probably at the expense of services
Table: INDIA Long-Term Macroeconomic Forecasts25
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Investment Climate 30
Air India: Throwing Good Money After Bad
The government’s insistence on keeping beleaguered state-owned carrier Air India on financial life support will be a costly and ultimately futile strategy
Business Environment Outlook 31
Institutions 31
Table: BMI Business And Operation Risk Ratings32
Table: BMI Legal Framework Rating33
Infrastructure 34
Table: Labour Force Quality35
Market Orientation 36
TABLE: ASIA, ANNUAL FDI INFLOWS36
Table: Trade And Investment Ratings37
TABLE: TOP EXPORT DESTINATIONS38
Operational Risk 39
Chapter 5: Key Sectors 41
Pharmaceuticals 41
Table: Patented Drug Sales Indicators 2007-201542
Table: OTC Medicine Sales Indicators 2007-201542
Table: Generic Drug Sales Indicators 2007-201542
Table: Prescription Drug Sales Indicators 2007-201543
Telecommunications 45
Table: Fixed-Line – Historical Data & Forecasts45
Table: Internet – Historical Data And Forecasts 45
Table: Mobile ARPU – Historical Data And Forecasts (INR)45
Other Key Sectors 47
Table: Defence and Security Sector Key Indicators47
Table: Oil and Gas Sector Key Indicators47
Table: Autos Sector Key Indicators47
Table: Food and Drink Sector Key Indicators47
Table: Infrastructure Sector Key Indicators48
Table: Freight Transport Sector Key Indicators48
Chapter 6: BMI Global Assumptions 49
Global Outlook 49
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS49
Table: EMERGING MARKETS AGGREGATE GROWTH50
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST51
Table: REAL GDP GROWTH CONSENSUS FORECASTS5
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