Economic Analysis
India

India

Population 1,334.2 million
GDP per capita 2,038 US$
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Synthesis

major macro economic indicators

 

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 8.2 7.2 5.5 6.2
Inflation (yearly average, %) 3.3 4.0 3.5 4.0
Budget balance (% GDP) -3.9 -3.6 -3.5 -3.5
Current account balance (% GDP) -1.5 -2.5 -2.5 -2.6
Public debt (% GDP) 67.8 68.1 69.0 68.5

(e): Estimate. (f): Forecast.

STRENGTHS

  • Diversified growth drivers
  • Large workforce (over 50% of the population under 25) with good command of English
  • Efficient private sector, especially services
  • Positive contribution from expatriates’ remittances, jewellery, garments, vehicles and medication exports, as well as tourism revenues to current account
  • Moderate level of external debt and adequate FX reserves

WEAKNESSES

  • High corporate debt and non-performing assets (NPA)
  • Net importer of energy resources
  • Lack of adequate infrastructure
  • Weak public finances
  • Bureaucratic red tape
  • Uncertainties over the Kashmir issue

RISK ASSESSMENT

Growth will remain subdued

The economy will continue to face headwinds in 2020. Slower domestic consumption (60% of GDP) is still recovering from the residual impact of demonetisation (withdrawal of the 500 and 1,000 rupee notes) and the introduction of a harmonized goods and services tax (GST), as their impact on the informal sector remains significant three years later. Meanwhile, tighter credit conditions are limiting private investment, key to unlocking the country’s growth potential. Non-performing assets (NPAs) in the banking system have declined, but they remain high (9.1% in 2019). This has made banks more cautious about extending credit, fearing their situation may get aggravated. The banking sector is also recovering from a series of corruption scandals in 2018 and 2019. Weaker investment growth has translated into fewer jobs, with unemployment levels reaching a record high of 8.45% in October 2019. The unemployment rate will likely fall slightly, but labour participation rates remain subdued at around 43%, which does not bode well for domestic consumption going forwards.

Inflation remains subdued, thanks to weaker energy and food prices. It appears that the Consumer Price Index (CPI) will remain below the Reserve Bank of India’s (RBI) target of 4.5% YOY in FY20. Some upside risks are possible in case of abnormal monsoon rains that disrupt supply. However, CPI below target allowed the RBI to cut interest rates by a cumulative of 135 basis points in 2019. This should have proven supportive of growth and employment under normal conditions, but there have been transmission problems owing to the issue of high NPAs. RBI will likely implement an additional 1-2 additional rate cuts in 2020, albeit with limited impact on activity. In this context, the onus will fall on fiscal policy stimulus. The government will also focus on structural reforms to boost foreign direct investment (FDI) and domestic liquidity. India overhauled its corporate tax system in August 2019, and is now on a par with other regional peers such as China, with even larger fiscal incentives for high-tech manufacturers that move to India within the next two years. Additionally, the Ministry of Finance launched a mega-merger of 21 state banks into 4 bigger entities, which will aid with issues related to bad debt.

 

Public finances to struggle amid headwinds

Finance Minister Nirmala Sitharaman unveiled an ambitious budget for 2020. In addition to corporate tax cuts, she proposed to expand a pension scheme to cover an additional 30 million people and measures to boost agricultural incomes (the agricultural sector employs 80% of the population). This means India will likely overshoot the fiscal deficit target to 3.3% of GDP in FY20. This is especially the case as revenues from the GST have been disappointing, both in terms of weaker domestic consumption but also due to problems with collection. India has also planned increases of import duties, higher taxes for high-income brackets and its first foreign currency offshore bond issuance. These should help to cushion downside pressures, but public finances will worsen before they can improve.

The current account (CA) deficit will likely widen further. Exports will continue to remain subdued, while imports are set to increase thanks to stimulus measures to boost domestic demand. Oil prices are set remain range-bound at around USD 60 per barrel in 2020.However, a potential shock could exacerbate pressures on the current account, as this remains India’s largest import. Rising demand for gold after demonetisation will also continue to play a role in driving imports. The rupee is therefore likely to remain subject to depreciatory pressures in 2020. Foreign exchange reserves remain at comfortable levels (nearly ten months of imports), and FDI and foreign portfolio investments are on an upward trend, and should accelerate in the coming years, thanks to recent structural reforms.

 

Modi’s BJP party keeps its majority, but support may dwindle

The alliance formed around Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) secured a landslide victory in the Parliamentary elections of May 2019 (349 out of 542 seats). Modi won his second election by focusing on job creation and investments in infrastructure, while tackling corruption and fostering the ideology of Hindu nationalism. Given the slow progress on the economic front, BJP could ramp up the nationalist agenda, something that would not sit well with foreign investors, who are keen on secular policies. India needs to attract FDI to plug its infrastructure gap, finance the current account deficit and boost potential growth. Tensions with Pakistan over Kashmir intensified, after Modi stripped the region of its semi-autonomous status in August 2019.

 

Last update : February 2020

Payment

Due to the increasingly developed banking network in India, SWIFT bank transfers are becoming more popular for both international and domestic transactions.

Standby Letters of Credit constitute a reliable means of payment, as a bank guarantees the debtor’s credit quality and repayment abilities. Confirmed Documentary Letters of Credit are also recognised, although these can be more expensive, as the debtor guarantees that a certain amount of money is available to the beneficiary via a bank.

Post-dated cheques, a valid method of payment, also act as a debt recognition title. They allow for the initiation of legal and insolvency proceedings in cases of outstanding payments.

Debt collection

Amicable phase

The practice of amicably settling trade receivables has proven to be one of the most productive solutions, as it allows the parties involved to deal with the underlying issues of the settlement in a more efficient and cost-effective manner. Average payment collection periods vary between 30 to 90 days following the establishment of contact with the debtor. Local working practices mean that debtors pay directly to the creditor, rather than to a collection agency. Indian law does not regulates late payments, or provide for a legal enforceable late payment interest rates. In practice, debtors do not pay interest on overdue amounts.

Major issues in the country currently mean that debtors are facing huge financial difficulties. The situation has deteriorated since demonetisation in November 2016 and the introduction of the GST unified tax structure (the Goods & Service Tax), in July 2017. The other main reason for payment delays is the complexity of payment procedures and approvals by banks for the restructuring plans of major players in the manufacturing sector. India is faced with a severe problem of bad loans and most of them have been declared as NPAs by the banks. This deteriorating asset quality has hit the profitability of banks and eroded their capital, thereby curbing their ability to grant much-needed loans to industries for their restructuring and revitalisation.

 

Legal proceedings

Indian companies have a preference for amicable recovery methods, as the country’s judicial system is both expensive and slow. There is no fixed period for court cases, while the average length is from two to four years. The statute of limitations is three years from the due date of an invoice. The statute of limitations can be extended for an additional three years, if the debtor acknowledges the debt in writing or makes partial payment of the debt.

Legal proceedings are recommended after the amicable phase, if debtor is still operating and in good financial health, is wilfully resisting payment, disputing the claim for insignificant reasons, not honouring payment plans or not providing documentary evidence.

 

Type of proceedings
  • Arbitration:arbitration can be initiated if mentioned in the sales contract - otherwise the case can be sent to the National Company Law Tribunal (the NCLT) for registered companies.
  • Recovery Suits:recovery suits tend to become a long, drawn-out battle and are usually regarded as best avoided.
  • National Company Law Tribunal:the NCLT was created on June 1, 2016. It has jurisdiction over all aspects of company law concerning registered companies. Its advantages are that it can hear all company affairs in one centralised location and that it offers speedy processes (taking a maximum of 180 days). It also reduces the work load of the High Courts. The NCLT recently enacted a new Insolvency and Bankruptcy Code. Decisions of the NCLT may be appealed to the National Company Law Appellate Tribunal (NCLAT). The NCLAT acts as the appellate forum and hears all appeals from the NCLT. Appeals from the NCLAT are heard by the Supreme Court of India.

Enforcement of a Legal Decision

A local judgment can be enforced either by the court that passed it, or by the court to which it is sent for execution (usually where the defendant resides or has property). Common methods of enforcement include delivery, attachment or sale of property, and appointing a receiver. Less common methods include arrest and detention in prison for a period not exceeding three months.

India is not party to any international conventions governing the recognition and enforcement of foreign judgments. However, the Indian government has entered into 11 reciprocal arrangements, and judgments from the courts of these reciprocating countries can be executed in India in the same way as local judgments. For judgments from non-reciprocating territories, a suit must be brought in India based on the foreign judgment before it can be enforced.

 

Insolvency proceedings

The Insolvency and Bankruptcy Code, introduced in 2016, proposes two independent stages:

 

Insolvency resolution process (IRP)

The IRP provides a collective mechanism for creditors to deal with distressed debtors. A financial creditor (for a financial debt), or an operational creditor (for an unpaid operational debt) can initiate an IRP against a debtor at the National Company Law Tribunal (NCLT). The Court appoints a Resolution professional to administer the IRP. The Resolution professional takes over the management of the corporate debtor and continues to operate its business. It identifies the financial creditors and holds a creditors committee. Operational creditors above a certain threshold are also allowed to attend meetings, but they do not have voting power. Each decision requires a 75% majority vote. The committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan, or to liquidate, within 180 days.

 

Liquidation

A debtor may be put into liquidation if a 75% majority of the creditors’ committee resolves to liquidate it during the IRP, if the committee does not approve a resolution plan within 180 days, or if the NCLT rejects the resolution plan submitted on technical grounds. Upon liquidation, secured creditors can choose to realise their securities and receive proceeds from the sale of the secured assets as a priority.

Under the current Insolvency and Bankruptcy Code, the highest priority is given to insolvency resolution process and liquidation costs. Thereafter, proceeds are then allocated to employee compensation and secured creditors, followed by unsecured and government dues.

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