India: Economy has potential, but risks remain – ABN AMRO

Arjen van Dijkhuizen, senior economist at ABN AMRO, suggests that over the past year, India has lost some of its shine as growth has fallen back to a six-year low of 5.0% in Q2-2019 and recent economic data are not promising either.

Key Quotes

“We expect economic growth to recover in the coming years, as the government has embarked on fiscal and monetary stimulus while we assume some stabilisation in the external environment following a difficult 2019.”

“One of the most important risks that could derail this outlook stem from the weaknesses in India’s financial sector, with challenges related to the areas of shadow   banking (illustrated by failures of several nonbank lenders) and weak asset quality at public banks (concentrated in the power sector).”

“Another risk stems from tensions with arch enemy Pakistan, which have flared up in the course of this year due to developments in Kashmir. Domestic political risks remain as well, partly reflecting tensions between different religious groups.”

“Fortunately, India’s external position has improved over the past years, as the current account deficit has fallen back to an expected 1.5% of GDP this year. Moreover, FX reserves have continued to rise and are now covering seven months of imports and almost four times short-term external debt.”