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EcoEmerging//4 quarter 2019
economic-research.bnpparibas.com
In the medium term, this measure should increase India’s
competitiveness, thereby favouring foreign direct investment (FDI).
Yet the Modi government must take its reform efforts further.
Restrictions on land acquisition and labour market rigidity continue
to place a major damper on domestic and foreign investment.
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– Balance of payments
4-quarter sum, of GDP
▬ Current account balance
█ Net portfolio investment █ Net other investment
█
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Net derivatives █ Net direct investment
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Public finances: risk of fiscal slippage in 2019/2020
For the second consecutive year, the federal government may not
meet its target of reducing the fiscal deficit to 3.3% of GDP in fiscal
year 2019/2020 (compared to 3.4% of GDP in 2018/2019). In the
first 5 months of the fiscal year, the fiscal deficit was already
equivalent to 78.7% of its full-year target.
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2
0
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4
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This poor performance can be blamed on revenues, which fell far
short of estimates. In the first 5 months of the current fiscal year,
spending amounted to 42.2% of the full-year target, but revenues –
though on the rise – accounted for just 29.8% of the full-year target
of 9.9% of GDP (vs. 8.8% of GDP in 2018/19). Taxes revenue was
the main component that fell short of the government’s forecast. It
amounted to only 24.5% of the full-year target due to the downturn
in domestic demand and foreign trade.
2013
2014
2015
2016
2017
2018
2019
Source: RBI
high of USD 401.6 billion at the end of September. Reserves cover
.4 times the country’s short-term financing needs (USD 297 billion).
At the same time, FDI and portfolio investment have increased (to
.9% of GDP and 1.4% of GDP, respectively, in H1 2019). The big
increase in FDI following the re-election of N. Modi is particularly
good news, because 1) it covers the current account deficit, and 2) it
reduces the country’s dependence on volatile capital inflows.
Although the current account deficit is likely to widen in the second
half of 2019 (after reaching 1.3% of GDP in H1 2019, compared to
According to government estimates, the cut in the corporate tax rate
will generate a revenue shortfall of 0.7% of GDP (including 0.46% of
GDP for the central government). Part of this shortfall will be offset
by a bigger-than-expected transfer of the central bank’s surplus: in
late August RBI announced that the transfer of “capital surplus” (in
relation to its needs) to the government would be equivalent to 0.8%
of GDP (vs. 0.5% of GDP in the finance ministry’s initial fiscal
forecast). If the government does not significantly reduce spending
during the rest of the year, the deficit for the general government
could increase by 0.4 pp to 6.7% of GDP. Consequently, the
government seems to be very far from meeting its target of reducing
the public debt ratio to 60% of GDP by 2025 (from 67.3% of GDP in
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% in the year-earlier period) it should continue to hold at about
.5% of GDP.
Lastly, external debt is still mild, although it has increased slightly
+8.7 in Q2 2019 y/y). At the end of June 2019, it amounted to only
19.8% of GDP. Commercial borrowing is the largest debt category
38.4% of the total), followed by non-resident deposits (24%) and
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018/2019).
(
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For an emerging country, India’s public debt is still high although its
structure is not very risky. Exchange rate risk is low because debt
denominated in foreign currency accounted for only 2.8% of GDP in
June 2019. Refinancing risk is also limited since the average
maturity on the debt is 10.4 years. Only 4.3% of its debt will reach
maturity over the next twelve months. With residents holding 93% of
its debt, the government is not very dependent on foreign investors
for debt financing.
(
short-term trade credit (18.7%).
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Less pressure on external accounts
India’s external accounts deteriorated in 2018. A wider current
account deficit combined with a decline in foreign direct investment
and portfolio investment resulted in a USD 15 billion decline in
foreign exchange reserves and a 9% depreciation of the rupee
against the dollar.
This movement has since been reversed. In the first 9 months of
2019, the average exchange rate has been stable and foreign
exchange reserves have increased by USD 33.5 billion to a record
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In comparison, Indonesia’s government debt accounted for only 30.1% of GDP
in 2018.