India Country outlook - Banco BPI
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Country outlook India
India
Closing date of this issue: July 2020
Form of Government: Federal parliamentary republic
India Capital: New Delhi
Official language: Hindi, English
Population: 1,368 billion inhabitants (2019)
Currency: Indian rupee (INR)
Exchange rate: 1 EUR = 84.80 INR (30/06/2020)
1 USD = 75.55 INR (30/06/2020)
GDP: $2,935 billion (7.9% of world GDP)
GDP per capita: $2,172 ($8,378 purchasing power parity)
Ease of doing business: 63th in the world out of 190
according to the World Bank (Doing Business)
Religion: Hindu: 80.5%
Country Outlook is a publication that is produced jointly by CaixaBank Research and BPI Research (UEEF) and it contains information and opinions from sources that we consider to be reliable. This
document is for information purposes only, so CaixaBank and BPI are not liable in any way for any use that may be made of it. The opinions and estimates are provided by CaixaBank Research and BPI and
may be changed without prior notice.India
PIB. Variación interanual (%)
Economic GDP. Year-on-year change (%) CPI. Year-on-year change (%)
forecast 10
Forecast
10
Forecast
7.5 8
5
5.0
6
0
4
4.4
3.5
-5 -4.5 2 2.5
-10 0
Average 2016 2017 2018 2019 2020 2021 2022 Average 2016 2017 2018 2019 2020 2021 2022
2011-15 2011-15
• The Indian economy will suffer a deep recession in • In 2020 inflation will drop slightly more than
2020 due to the impact of COVID-19. The overall 1 pp, mainly because the collapse in consumption
decline in activity in 2020 will be heavily marked due to COVID-19 suppress demand pressures.
by a collapse in Q2 that could reach double figures The fall in oil prices, the expectation of a quiet
10
after the country’s lockdown in the spring of 2020. summer monsoon season that does not cause
If the epidemic is successfully tackled, the economy major supply disruptions and a favourable base 8
should start to recover very gradually during the effect (inflation rebounded strongly in the 6
second half of the year, although this will not be 10 second half of 2019) all point to inflation in
4
enough to avoid a drop in GDP that could be close 2020 being slightly above the minimum value
5
to 5% on the average for the year. Workers in the (2%) of the target range set by the central bank 2
Indian informal economy and the services sector 0 (between 2% and 6%). In 2021 and 2022, with 0
will be particularly affected by this recession and the reactivation of the economy, a gradual rise
the effects on the labour market will take time to -5 in inflation is expected towards the intermediate
recede. In 2021, the economy should rebound values of the range.
-10
strongly and recover lost ground in 2020, provided
there is an effective coronavirus vaccine or
treatment.
Economic Benchmark interest rate (%)
policy and exchange rate (INR/USD) Fiscal balance (% GDP)
Forecast Forecast
10 74.1
80 15
72.4 71.2 12.0
8 EE. UU. Eurozona 10
Emergentes
60 5
6
Fuente: CaixaBank Research, a partir de datos deCitigroup y Bloomberg.
0
4
3.7 4.0 40 -5 -8.5
3.5 -10.0
2 -10
0 20 -15
Average Average 2016 2017 2018 2019 2020 2021 2022 Average 2016 2017 2018 2019 2020 2021 2022
2011-15 2011-15 2011-15
Benchmark interest rate (left scale)
Exchange rate (right scale)
Current account (% GDP) Public debt (% GDP)
Forecast Forecast
1 85
0.6
0.0 80
0 80.0
-0.5 78.0
75
77.0
-1
10 80 70
8
-2
65
60
6 -3 60
Average 2016 2017 2018 2019 2020 2021 2022 Average 2016 2017 2018 2019 2020 2021 2022
4 2011-15 2011-15
40
2 •
The central bank is bearing the brunt of the •
The Modi administration has announced a
0
economic response to the COVID-19 crisis. 20
stimulus package of 10% of GDP to counter the
Specifically, it has reduced the reference interest effects of COVID-19. However, most of these
rate from 5.15% in effect when the lockdown incentives will be in the form of public
began to 4% at the end of the first half of the guarantees for the granting of loans, and it is
85
year, and it still has some scope to make further estimated
1 that direct fiscal aid will never exceed
decreases. It has also injected liquidity into the 2% of GDP. Direct aid will80focus on supporting
0
economy for a value close to 5% of GDP. the most vulnerable sectors
75
(migrant workers,
farmers-1 and workers who have become
unemployed in rural areas).70
-2 65
-3 60India
Financial Private credit (% GDP) Gross external debt (% GDP)
conditions 50
Forecast
23
Forecast
22.4
48 22
48.0 48.0
47.0 21
46 20.3
20
44 19.6
19
42
18
40 17
Average 2016 2017 2018 2019 2020 2021 2022 Average 2016 2017 2018 2019 2020 2021 2022
2011-15 2011-15
• COVID-19 will increase pockets of vulnerability in of more vigorous support measures, such as
some parts of the Indian financial system. enabling new direct credit lines to companies. In
50
Specifically, the percentage of non-performing this context, private credit will continue at modest
loans (from 9.2% at the end of 2019) is expected levels, which will48 limit the speed of economic
to increase substantially (some studies suggest recovery. 46
that they will double). In addition, the banking • To mitigate the 44effects of COVID-19, the central 23
system is undergoing a major transformation bank has taken certain measures to alleviate the 22
(recapitalisation of public banks of GDP, 42
situation in the financial sector, such as a 21
implementation of the bankruptcy and insolvency moratorium on term40 loans and liquidity measures 20
code and sector consolidation plan), and the for small and medium businesses. The central 19
current situation may require more measures to bank has also relaxed the obstacles for foreign 18
strengthen it. COVID-19 will therefore necessitate capital inflows, which helped make outflows of 17
the acceleration of the restructuring of capital manageable for the economy in the first
problematic bank assets, a large part of which half of the year.
are in the hands of public banks, and the taking
Political • The importance of the shock of the coronavirus • President Narendra Modi won the general
situation may alter the direction of the Modi Government’s election held in April 2019, achieving a
economic policy. On the one hand, the comfortable absolute majority in the lower
government will have to increase public chamber. Modi will thus be free to implement his
expenditure to help revive the economy. On the agenda during his term, which ends in 2024.
other, it will have to make progress with far- Nonetheless, increasing polarisation following
reaching structural reforms in labour and the approval of the citizenship law, which
infrastructure. Modi has said that the coronavirus facilitates the legalisation of undocumented
crisis is the ideal time to undertake these reforms, persons, provided they are not Muslim, the higher
given that the repositioning of global value risk of poverty due to COVID-19 and the tensions
chains represents a good opportunity for India to with Pakistan in the state of Jammu and Kashmir,
attract employment and investment from the rest constitute threats to the political stability of the
of the world. country.
Long-term GDP growth (%) Population (milions of inhabitants)
outlook 7.4 1,550
7.2
7.2 1,494.0
1,500
7.0
1,450
6.8
6.5
6.6 1,400
1,368.1
6.4
1,350
6.2
6.0 1,300
Average 2010-19 Average 2020-30 2019 2029
•
The Modi Government’s reforms to increase 190 countries with a better environment for
infrastructure spending and the expansion of doing business. The country must also modernise
technological, pharmaceutical and manufacturing its digital infrastructures to enable greater use of
companies will all contribute to creating an remote work, an important practice so that
environment more conducive to long-term productive activity does not fall as much when
growth, although more profound reforms are there is a pandemic like the current one.
essential to increase potential growth. Particularly •
Long-term growth will be supported by very
pressing issues to be resolved are the elimination favourable demographics. To make the most of
of obstacles for acquiring land, the full the increase in the working-age population,
liberalization of trade and the ironing out of however, labour market reforms will be necessary
rigidities of the labour market (which props up a in order to create new jobs. A factor of particular
huge informal economy). The margin for concern is the extremely low rate of female
improvement in creating a business-friendly participation in the labour market (24% according
environment is apparent in the World Bank to the World Bank), which is the lowest among
ranking, which measures the ease of doing emerging countries (in China, for example, the
business: in 2019, India was 63rd out of a total of figure is 61%).India
Country Last CDS* 5 years (basis points) OECD credit risk rating
Rating Outlook
risk changed
(from 0 to 7, with 0 being the best)
120
102.2
BBB- 30/01/07 Stable 100
3
75.7
80
60
Baa3 01/06/20 Negative
40 7
20
BBB- 01/08/06 Negative 0
Average 2016-19 30/06/2020
Indicates that the country has an “investment grade”. *Credit default swap: measurement of country risk that reflects
Indicates that the country does not have an “investment grade”. the cost of ensuring the non-payment of the sovereign bond.
Risks SHORT-TERM LONG-TERM
• Greater than expected • Inequality - +
global impact of the pandemic - + • Inefficient and oversized
public sector - +
• Greater than expected
impact of the pandemic in India - +
• Failure to implement
• Increased tightening up reforms - +
- +
of international financing
• Instability of the banking
system - +
• New social unrest - +
Business STRENGTHS WEAKNESSES
environment • Market size. • Institutions (bureaucracy and pending
• Dominance of English. modernisation).
• Tertiary education. •Inefficient labour market.
• Cutting-edge Institutes of Technology. • Infrastructure deficit.
• Poverty.
• Low education level.
•Clear rise in the ICT service industry.
Main sectors EXPORTS IMPORTS
• Metals and precious stones, mineral fuels, •
Mineral fuels, metals and precious stones,
machinery, vehicles and organic chemicals. electronics, machinery and organic chemicals.
Main trading Exports
Exports Imports
Imports
partners %%of of total
total exports
exports %% of of
total
total
imports
imports
Japan
Japan 4.7 4.7 India
India 4.1 4.1
UK UK 5.1 5.1 Saudi
Saudi
Arabia
Arabia 5.8 5.8
USAUSA 6.8 6.8 USAUSA 6.0 6.0
Germany
Germany 7.5 7.5 Germany
Germany 9.9 9.9
China
China 9.2 9.2 China
China 18.418.4
0 0 2 2 4 4 6 6 8 8 10 10 0 0 5 5 10 10 15 15 20 20
Source: BPI Research, based on data from Bloomberg, IMF, OECD, Oxford Economics and Thomson Reuters Datastream.India
Taxation In July 2017, India implemented its biggest In terms of the remaining taxes in India,
fiscal reform with the inclusion of the GST personal income tax varies from a minimum
(goods and services tax), with the aim of rate of 10% to 30%, according to income.
unifying the whole country and turning it Corporate tax depends on whether the
into a market with uniform taxes. It is a company is Indian or foreign, being 30% for
common indirect tax for all of its states and national firms (with a 10% surcharge when
territories. The aim of implementing this tax revenue exceeds INR 10 million and an
was to have a system that would consider education cess of 3%) and 40% for foreign
India as one market and would mean it was firms, non-resident companies (with a 2.5%
no longer fragmented. It is a historical reform surcharge when revenue exceeds INR 10
and the country is currently in the process of million and also an education cess of 3%).
learning and adapting to it, which is why Companies with an income of more than INR
there may be minor modifications in the 10 trillion must allocate 2% of net profit to
coming years. social projects.
The GST is divided into various rates, with the Finally, it is important to note that the fiscal
maximum type currently being 28%, although year in India runs from 1 April to the following
the majority of products are in the range of 31 March.
18%.
Investment The country receives an increasing amount of sectors are: services, construction,
foreign investment thanks to its projected telecommunications, IT programmes and
growth and numerous strong points, including materials, medicine and pharmaceutical
highly specialised services and a cheap English- products, automotive industry, chemical
speaking workforce. The main investment products and energy.
Establishment LOCAL COMPANY
The main legal forms present in India for the result of combining a Partnership and a
company start-ups are: Limited Company, which can be public or
• Sole Proprietorship: sole proprietors. private, as well as of limited or unlimited
• Partnership: Companies formed by the liability.
association of two or more individuals. •
Company is the option via which foreign
• Limited Liability Partnership: Limited Liability firms are regulated, using subsidiaries or
Partnership, a form created in 2010 that is joint ventures.
BRANCH
A branch, understood as an office in the information technology services and
country, does not have the status of a joint developing software and providing technical
stock company but is an extension of the support for products supplied by the parent
foreign firm in India. A branch of a foreign company.
firm is limited to the following activities by the A branch is subject to tax in India and is
Reserve Bank of India (RBI): representing the allowed to repatriate any profits made after
parent company and acting as its agent in paying the relevant taxes. However, it is not
sales and purchases, carrying out import allowed to carry out activities of production or
activities and export trade, promoting direct processing, although it can outsource
technical and financial collaborations between these activities to an Indian manufacturer or
Indian and foreign companies, providing locate itself in a special economic zone (SEZ)
professional or consulting services, providing where such activities are allowed.
REPRESENTATIVE OFFICE
This is the simplest form of start-up with the least generated there are no fiscal implications. Such
risk. The aim of such offices is solely to supervise offices cannot be paid any fees or receive other
commercial networks, raise awareness of the income from clients from India for providing
products among existing and prospective clients services. All expenditure is met by internal
and explore new business and investment remittances. A foreign firm setting up a
opportunities. A representative office is not representative office in India cannot repatriate
allowed to carry out any commercial activity that money from India.
generates an income in India. As no income isIndia
Alliances FREE TRADE ZONE
strategic The government has established several and these are located in Santa Cruz
special zones for foreign trade with the idea (Maharashtra), Cochin (Kerala), Kandla and
of boosting production aimed at exports. Surat (Gujarat), Chennai (Tamil Nadu),
Within these zones are special economic Visakhapatnam (Andhra Pradesh), Lack
zones (SEZ), industrial free trade zones (IFTZ), (Bengala Occidental), Noida (Uttar Pradesh)
software technology parks (STP) and export and Indore (Madhya Pradesh).
oriented units (EOU).
There are currently nine SEZs in the country,
the closest formula to the so-called free zone,
JOINT VENTURE
This kind of agreement is very common because There are two ways to set up a joint venture:
India encourages foreign collaboration to automatically or via the government route. The
facilitate capital investment, capital goods first is simpler as it requires no approval or
imports and technology transfer. However, it government permit. The second is divided into
is advisable to be cautious as, once a decision two types depending on whether an industrial
has been made to set up a joint venture, the licence is required, granted by the SIA (http://
following guidelines should be taken into dipp.nic.in/) under the recommendations of
account: the roles and expectations of each the Licensing Committee. Investments subject
partner should be defined because equality and to government approval are described as the
trust will help maintain the company, experience “government route” and require the approval
should be regarded as a key factor and a long- of ministries and bodies before the investment
term approach should be considered. is made.
Customs FREE TRADE AGREEMENTS
conditions This market has approached regional trade Malaysia, Finland, Nepal, Singapore, Japan
agreements (RTA) as stages towards the and South Korea, among others.
overall objective of liberalising trade. The The European Union and India are currently
country is currently participating in a number committed to increasing even further their
of agreements including free trade flows of trade in goods and services, as well
agreements with Sri Lanka, preferential trade as bilateral investment policies and access to
agreements with countries such as Chile, public contracts via negotiations under the
Afghanistan and Mercosur and global Free Trade Agreement implemented in 2007
agreements of economic cooperation with and still in force today.
FREE TRADE ZONE
Special economic zones have the status of a receiving exemptions from requirements
foreign territory so the companies operating regarding the granting of industrial licences
within these zones are not subject to the same and enjoying tax breaks and other rebates.
tax regimes as companies resident in the Industrial free trade zones are industrial estates
country; both in terms of customs regulations, with incentives for foreign investors in export-
for the purposes of trade and customs duties, oriented companies.
tariffs and duty free, and also in terms of
GENERALISED SYSTEM OF PREFERENCES (GSP)
The Bangkok agreement, an initiative by the operate under these agreements: Bangladesh,
Economic and Social Commission for Asia and India, Korea, China and Sri Lanka. India also has
the Pacific (ESCAP), encouraged the expansion preferential trade agreements with Mercosur,
of trade by exchanging customs concessions Egypt, the South African Customs Union (SACU)
between the signatory countries. After some and Afghanistan.
modifications there are five states that stillIndia
Negotiations BUSINESS CULTURE
and protocol This country has significant cultural differences The best time to arrange appointments with
with Spain which must be taken into account Indian directors is before or after lunch (at 11
when handling any kind of business contact. am or 4 pm) and it is not strictly necessary to
Nevertheless, Indians also pay attention to wear a suit and tie at meetings unless the
these differences and modify certain aspects of occasion is very formal or top level.
their behaviour such as greetings, using a brief The company’s hierarchy must be respected and
handshake when meeting and taking leave. the right contact person identified. Negotiations
Other forms of physical contact are not welcome are tough in terms of price and established for
in public. the long-term.
Top fairs • Agritech. • Auto Expo.
• Acetech. • FoodTec.
• India Chem. • India Lab Expo.
Websites • Investing in India: http://investindia.gov.in/
of interest • Development programme “Make in India”: www.makeinindia.com
• Indian customs: www.cbec.gov.in
• Indian Chamber of Commerce: www.indianchamber.org
Payment MEANS OF COLLECTION
and charging It is advisable to always guarantee that payments Acceptance). Another possibility is bank transfer
methods are received by using the usual international although, given the cultural differences and
methods, primarily documentary credit, which distance of the market, this is not recommended
offers most guarantees. Documentary remittances for initial payments and should only be used once
can also be used: sight (CAD-Cash against a climate of trust has been established.
Documents) or term (DA-Delivery against
MEANS OF PAYMENT
Documentary credit is the payment method credit with deferred payment also provides
that is most trustworthy, as well as documentary exporters with financing facilities via the
remittances, both CAD and DA. Documentary issuing bank.
EXCHANGE RATE INSURANCE
The rupee is an unstable currency and, in fact, in interest to purchase exchange rate insurance.
the last few years India has taken various measures However, most transactions are made in US dollars
in an attempt to stop the national currency from (exchange rate insurance is advisable) and in euros.
depreciating, some of these being considered
“desperate”. This is a country where it may be ofYou can also read
