India: Country outlook

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Economist Intelligence Unit
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Economy, Outlook, Forecast, Overview
Political Geography

India: Country outlook


POLITICAL STABILITY: The Economist Intelligence Unit expects that, with a majority in the Lok Sabha (the lower house of parliament), the ruling Bharatiya Janata Party (BJP) will stay in power for its full term, which ends in 2024. Political stability will be underpinned by the widespread support for the prime minister, Narendra Modi, who will remain the dominant figure in the government. Decision-making will remain centralised among the prime minister's office and key ministers.

ELECTION WATCH: The next general election is expected to be held in May 2024. The focus before then will be the state assembly elections. Historical precedent suggests that voters treat state and national elections differently, and that local issues tend to be more important in the former. The state election in West Bengal, scheduled for April-May 2021, will be the most significant election this year as the BJP tries to wrest power from the current chief minister, Mamata Banerjee, who is a strident critic of the Modi government. We currently expect the election to be a close contest between the BJP and Ms Banerjee's party. A defeat for her will further weaken the national political opposition to the BJP.

INTERNATIONAL RELATIONS: We expect relations with Pakistan to remain strained throughout 2021-25, but do not anticipate a complete breakdown of diplomatic ties. We believe that Pakistan's military will continue to support militant groups in Kashmir, and this will keep the risk of terrorist attacks elevated. Although small-scale military exchanges between the two countries are likely in 2021-25, their nuclear arsenals will act as a powerful deterrent against full-scale conflict.

POLICY TRENDS: In February 2021 new coronavirus (Covid-19) infections in India registered a slight uptick, after having declined steadily since the peak in September 2020. The country continues to register a large number of cases on a daily basis. Some cities will adopt containment measures to ease pressure on the healthcare system, but these measures will be highly localised and applied intermittently. The government's near-term priority will be to scale up India's vaccination programme, which began in January 2021. The government aims to inoculate 300m people by August; we expect widespread immunisation of the population to be achieved by end-2022.

ECONOMIC GROWTH: We expect real GDP to contract by 7% in 2020/21-the sharpest annual decline in economic activity since India's independence in 1947-reflecting the impact of the country's stringent lockdown measures. The economy is estimated to have registered slight year-on-year growth in October-December 2020 (the third quarter of the fiscal year).

INFLATION: We expect consumer price inflation to decelerate to 5% in 2021, from 6.6% in 2020. This deceleration will primarily be the result of easing food prices from end-2020 (owing to a good domestic harvest), which will offset inflationary pressures created by a rise in fuel prices and strong private consumption growth. Our forecast assumes a normal monsoon in 2021 (and in every year of the forecast period). In 2022 we expect consumer price inflation to decelerate to 4.7% as global crude oil prices (dated Brent Blend) rise at a slower pace and growth in private consumption normalises. From 2022 we expect the central bank to prioritise containing inflationary pressures and start monetary policy tightening. Consumer price inflation is expected to average 4.1% in 2023-25, close to the central bank's target.

EXCHANGE RATES: The rupee, on a yearly average basis, is expected to appreciate marginally against the US dollar this year, to an average of Rs73.8:US$1, after depreciating by 5% in 2020 to Rs74.1:US$1. Our forecast of a slight appreciation in 2021 is due to our expectation of the rupee being undervalued at end-2020, because of the efforts of the Reserve Bank of India (RBI, the central bank) to increase sharply its foreign-exchange reserves. In turn, the rupee will continue on its appreciatory trend in the coming months. However, the RBI's inclination to maintain export competitiveness will limit this short-term appreciation, and the rupee is expected to return to its depreciatory trend against the US dollar from mid-year. From 2022 we expect the rupee to return to its depreciatory trend against the US dollar owing to a widening current-account deficit as imports pick up.

EXTERNAL SECTOR: The value of merchandise exports is forecast to grow by 18.8% in 2021 as economic conditions in India's destination markets normalise. Nevertheless, we expect the current account to return to a deficit equivalent to 0.8% of GDP this year, after registering a surplus in 2020. The current-account deficit will primarily be a result of a widening trade deficit caused by a sharp rebound in imports, which are expected to grow by 31.5%. This strong growth will be on the back of a recovery in the domestic economy, as well as of a rise in global oil prices.

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