India Country Risk Report

The Indian economy is a good performer among emerging economies, with +6.5% growth on average over 2000-2019 and +6.9% over 2010-2019 (roughly in line with emerging Asia). However, the Covid-19 crisis hit India badly and the economy was already in a vulnerable state at the end of 2019. The resulting contraction in GDP was among the deepest in the Asia-Pacific region. A partial recovery was thereafter delayed by a renewed outbreak of Covid-19 (the Delta variant). Despite a moderation in growth in 2022, India’s economy remains resilient and outpaced the average growth rate among emerging economies and Asian economies. Thereafter, Indian growth bounced back and reached +8.2% in FY23-24, exceeding our expectations. We now expect India to grow by +6.6% in FY24-25 and +6.4% in FY25-26. Public spending, foreign investment and easing inflation will be tailwinds. Over the longer run, we expect India to become the second-largest economy in the Asia-Pacific region by 2030. Five game-changers could shape India’s mid-term economic outlook: foreign investment, trade, human capital, climate change and geopolitics.

In terms of public policies, the fiscal deficit has declined slightly since the Covid-19 years and should continue to do so in FY24-25, according to the budget. But public spending remains elevated and should even increase in 2024, supporting energy, transport, infrastructure and measures for households. On the monetary side, after policy tightening to contain inflation (250bps of cumulative rate increases between May 2022 and February 2023), we expect the Reserve Bank of India (RBI) to start cutting the policy rate in the second half of 2024 as inflation is likely to approach its 4% target. This will help ease financial pressure on households and businesses.

India’s business environment is close to the median in our assessment of 185 economies, with little change in recent years. The Heritage Foundation’s ‘Index of Economic Freedom’ survey in 2023 assigns India rank 126 out of 184 economies (slightly improved from 131 in the 2022 survey), reflecting good scores with regard to the tax burden, government spending, business, trade and monetary freedoms though weaknesses remain in particular with regards to fiscal health, investment freedom, financial freedom, government integrity and property rights. Meanwhile, the World Bank Institute’s annual ‘Worldwide Governance Indicators’ survey indicates scores since 2019 that have stagnated in the control of corruption and the rule of law and slightly improved in regulatory quality and government effectiveness (all roughly in the 45-60% percentile range). Our proprietary ‘Environmental Sustainability Index’ puts India at rank 175 out of 202 economies, reflecting better performance in energy use per GDP and CO2 emissions per GDP, but weaknesses in terms of climate change vulnerability, renewable electricity output and the recycling rate.

The ruling Bharatiya Janata Party (BJP) remains in power following the general elections held in 2024. However, it won by a much thinner majority than expected, which could prevent it from gaining widespread support for crucial reforms such as easing land acquisition, labor laws or privatisations. Narendra Modi, prime minister since 2014, remains the dominant figure in the government. Although his popularity remains high, his party could potentially face credible political opponents if regional parties make it to the national level. Nevertheless, the stability of this government is unlikely to be challenged in the coming few years. We would watch out for possible episodes of the BJP intensifying its Hindu nationalist agenda, potentially generating communal clashes, and the potential emergence of rival political parties.