After weeks of hubris, PM Modi finally admits that Covid’s economic impact on India will be “huge.”
Well, they say admission is only half the battle.
The cure may be a tougher pill to swallow, though.
For starters, let’s look at the economic facts:
- The United Nations said the growth outlook for the Indian economy is “highly fragile,” and with the World Bank predicting “a contraction of nearly ten percent.”
- The International Monetary Fund said the second COVID wave “posed downside risks to the Fund’s April forecast for 12.5% growth” and that the “IMF will revisit that forecast when it issued a fresh World Economic Outlook in July.”
- India’s unemployment rate according to the Centre for Monitoring Indian Economy was 8% in April.
- Fitch Ratings affirmed a BBB sovereign rating for India with “Negative Outlook,” noting the “Negative Outlook reflects lingering uncertainty around the debt trajectory following the sharp deterioration in India’s public finance metrics due to the pandemic shock from a previous position of limited fiscal headroom. Wider fiscal deficits, and government plans for only a gradual narrowing of the deficit, put greater onus on India’s ability to return to high levels of GDP growth over the medium term to stabilise and bring down the debt ratio.”
- Moody’s “slashed India’s growth forecast for the current financial year and issued a “‘Baa3’ rating on India with a negative outlook” noting “high debt and weak financial system constrain sovereign credit profile.”
- UBS head of emerging market strategy, Manik Narain, told Reuters, “We do see the risk that it (a downgrade) can definitely happen… It seems more a question of when rather than if.”
Growth Market Post-Covid? Not So Fast…
In a story last week, that appeared in the Financial Times, Brijesh Ved, an equities portfolio manager at BNP Paribas Asset, quipped that post-Covid “long-term fundamental investors like ourselves continue to look at India as a growth market.” Yes, with a billion+ people, India is a growth story.
But the latest FDI data from the Indian government shows an unusual swing to just one sector – computer hardware and software – and away from the service sector which employs far more of India’s struggling work force. The numbers suggest that sunny growth forecasts are a mirage, and the reality of an FDI desert in most sectors, is hidden from view.
More to this point: A recent column by Subrata Majumder’s in Eurasia Review acknowledges “FDI is an integral part of the Indian economy” but then puts forward the idea that India’s digital transformation led to “FDI attraction.” As we touched on recently, we assume he is conflating buying Indian domestic equities when they are cheap as the same as attracting job-producing direct investment from foreign investors. That’s just not the case.
India’s central bank, the Reserve Bank of India, has issued a cautionary note post-Covid, noting, “The recovery of the economy from Covid-19 will critically depend on the robust revival of private demand that may be led by consumption in the short-run but will require acceleration of investment to sustain the recovery.”
Will require an acceleration of investment. Yet, the Modi Government does not believe in encouraging investment.
This quote from an unnamed Modi regime officials summarizes the current state of their thinking as they continue to ignore international arbitration tribunal rulings following the termination over 50 bilateral investment treaties (BITs), “There is no correlation between BITs and the investments coming to the country.”
Except, there is a correlation: investments flock to rule-of-law jurisdictions where their investments are safeguarded. India, under Modi, is losing its membership of that club. The country sits almost dead last (163rd out of 190 countries) in the World Bank’s ‘Enforcing Contracts’ rankings.
This will drag on future growth – but current growth is already a problem. India’s FDI is in steep decline and the economic impact is “huge” in the words of the PM himself.
Constraining India’s sovereign risk profile are its significant and growing contingent debt liabilities. These arbitration awards – which Modi refuses to honor, driving up accruing interest — are putting downward pressure on the Modi government’s finances, including, most notably:
- Vodafone: US $2 billion
- Cairn Energy: US $1.4 billion
- Devas: US $1.4 billion
The impact is not only in dollars and cents. Confidence and trust – those vital but intangible ingredients that drive investment decisions – are withering with every day that Modi refuses to pay debts and respect arbitration rulings.