India: Robust growth, despite weak banking sector

04 September 2017

The Indian economy will continue to post robust growth in the coming quarters, although a weak banking sector and the impact of demonetisation will prevent it from reaching its potential. Business-friendly reforms will benefit investors in the next 12 months, although small and medium sized firms may face elevated compliance costs under the new Goods and Services Tax.

Security Environment

In July 2017, an al-Qaeda-affiliated media network announced the creation of a new militant group, Ansar Ghazwat-ul-Hind (AGUH) in Indian-controlled Kashmir. AGUH reportedly has fighters in four districts in the Kashmir Valley, around 10 commanders and is in possession of small arms. The group likely has the capability to launch improvised explosive devices (IED) in the region, targeting Indian security forces in the area, as well as Hindus and tourists. AGUH will be able to tap into strengthening anti-Indian sentiment in the Kashmir Valley, where youth unemployment is high and sympathy for militant Islamist movements is growing.

However, it is unlikely to develop a broad operational presence, given the greater popularity of Islamic State (IS) in the region. This will limit recruitment efforts, as well as the ability of al-Qaeda to provide funding and operational support to AGUH. 

As a result, the rising threat posed by IS-linked cells will be of greater nationwide concern than the formation of AGUH. In March 2017, 10 people were injured following the explosion of an IED planted by an IS-inspired cell at a train station in Madhya Pradesh. IS-linked groups will continue to target civilians, foreigners and Shia Muslims in IED attacks on public spaces in the next 12 months, elevating death and injury risks for expatriate workers.

Trading Environment

The Indian economy will continue to perform well in the next 12 months, with real GDP growth forecasted at 6.9% in FY2017/18. Growth will be underpinned by favourable structural and demographic conditions. Business-friendly reforms implemented by Prime Minister Narendra Modi, such as the ‘Make in India’ campaign to increase manufacturing’s share of GDP from 15% to 25%, will also provide upside support for the economy.

However, growth has been below expectations in recent quarters. The last quarter of FY2016/17 saw growth of 6.1% y-o-y below the forecasted 7.1%. This reflects cyclical downside risks in the Indian economy. In November 2016, the government demonetised the two-largest denomination banknotes, in order to tackle tax evasion and counterfeiting. This created immediate cash shortages and restricted consumer spending. Around USD 230 billion was demonetised, representing approximately 87% of all currency in circulation. The effects of demonetisation are beginning to pass, however a stronger recovery in private investment will be dampened by a weak banking sector, which has seen rising non-performing assets since 2016. This has limited credit growth and contributed to a 2.1% contraction in fixed capital formation in Q4 2016/17. 

Investment Environment

In July 2017, the Goods and Services Tax (GST) came into effect following years of negotiations. The GST has replaced numerous, overlapping state and national taxes with a single system and, in theory, should prevent double taxation. The GST should particularly benefit retailers, logistics firms, healthcare firms and large manufacturers operating across state borders. However, the new system remains complicated. There are 6 tax bands and state governments retain authority over administration of the GST for 90% of small and medium enterprises (SMEs), elevating the risk that GST will be applied unevenly through the country. As a result, SMEs will likely see compliance costs rise over the next 12 months. 

The government has worked to improve the legal process for commercial dispute resolution, passing the Commercial Courts Act in January 2016. The act established commercial courts at the state level to adjudicate in disputes relating to sums larger than USD 160,000. This has reduced the number of cases reaching high courts, and so should facilitate more efficient dispute resolution for investors.

India: Robust growth, despite weak banking sector

** Pricing varies according to sector. Risks in textiles, manufacturing and IT will see pricing closer to 0.6% p.a., whilst mining risks are likely to be priced at 1.5% p.a.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Colombia, Kenya and Paraguay, all of which have been the subject of recent enquiries from JLT's client base.

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email