India

major macro economic indicators

(e): Estimate (f): Forecast *FY 2023: April 2023-March 2024

RISK ASSESSMENT

Strong growth momentum continues

India is expected to show slower but still robust growth momentum in 2024. In 2023, a combination of subdued global demand and a weak monsoon season have weighed on Indian exports and household consumption. Net exports were a drag on GDP amid global trade slowdown. Going ahead, weak external markets will however continue to weigh on Indian export growth. Private consumption growth will be supported by durable urban demand amid strong personal loan growth. An improvement in rural demand will materialise only if favourable weather conditions prevail and farm output improves. An easing of lending standards brought about by healthy bank balance sheets and election-related spending should support consumption.

Retail inflation saw a renewed push higher into the end of 2023, reflecting weather-related impacts on the main food and beverage segment, which accounts for nearly half of the consumer price index basket. Spiking prices for certain food items such as rice and onions due to an patchy monsoon led to strong inflationary pressures, which prompted the government to implement a combination of measures, including export restrictions, stocking limits, releasing government supplies, to tame prices ahead of the 2024 general elections. Furthermore, India continues to enjoy savings from discounted Russian oil imports. The disinflation trend should continue in 2024, but is likely to remain above central bank’s target of 4%. Furthermore, food price volatility continues to pose upside risks to the inflation outlook, which should see the Reserve Bank of India maintaining its policy interest rate at 6.5% for at least the first half of 2024.

The medium-term outlook has brightened, bolstered by the push on infrastructure spending over the past five years which is also acting as a key growth catalyst. Capital expenditure rose to a record 3.3% of GDP in the fiscal year 2023-24 from 2.7% previously. Fixed investment (29% of GDP) continued to grow at a solid pace in 2023, contributing 45% of the GDP growth in the first three quarters of 2023, compared to 49% in 2022. Continued emphasis on infrastructure investment through flagship programmes such as the National Infrastructure Pipeline and the National Logistics Policy will play a crucial role in the country’s capital spending in 2024. We expect the central government to set aside another significant amount for capital expenditure in the fiscal year 2024-25. The authorities’ supply-side push towards manufacturing such as the Make in India initiative, a production-linked incentive scheme, a programme for semiconductor and display manufacturing, and continued supply diversification would also provide the impetus for private sector investments. Boasting stronger balance sheets after years of deleveraging, India’s banking sector is also in a stronger financial position to support corporate lending to the infrastructure sector.

Fiscal consolidation to continue

The budget deficit has been shrinking since the pandemic-impacted surge to -12.9% of GDP during 2020. Fiscal consolidation is expected to continue. India’s gross tax-to-GDP ratio is low at an estimated 11% of GDP in FY2023-24, compared to the Asia Pacific average of 19.8% and the OECD average of 34.1%. More careful targeting of subsidies and additional revenue generation (new taxes on asset sales) will be necessary to achieve a longstanding plan to narrow the fiscal deficit to -4.5% of GDP by FY2025-26. However, there will be spending pressures in 2024 arising from pre-election expenditure on fuel and food support through subsidy allocations. The budget deficit has been mostly financed by market borrowings through government securities and treasury bills (69%), but is also increasingly sourced from issuing securities against small savings (26%), which are public accounts that collect money from the public in savings schemes.

The current account deficit narrowed to 0.7% of GDP in the first three quarters of 2023 due to both a smaller merchandise trade deficit (6.5% of GDP) and a larger services trade surplus (4.4% of GDP) linked to IT services. Net outflows from the income accounts continued, reflecting payments of foreign investment income, but also a slowdown in remittances (1.7% of GDP) growth. India's main sources for remittances were the United Arab Emirates, the United States, Saudi Arabia, Oman, and Kuwait.

National elections

The ruling Hindu nationalist Bharatiya Janata Party (BJP) won three out of five state elections (Madhya Pradesh, Rajasthan and Chhattisgarh) in November 2023, giving a significant boost for the BJP ahead of a national general election due by May 2024, in which Prime Minister Narendra Modi will seek a third term. Modi remains widely popular after a decade in power, and BJP successfully broadened its popular support to include women and marginalised groups, building on its traditional Hindutva base. Furthermore, internal rivalries within the opposition alliance led by the Congress and a lack of a viable alternative social vision are brightening BJP’s election prospects in 2024.
India’s longstanding commitment to strategic autonomy is a cornerstone of its foreign policy and the country prefers to strike its own path in global geopolitics. While India has close strategic ties with the US and is part of the Quadrilateral Security Dialogue (Quad) with Australia, Japan and the US, it is the only major power to have membership in other organisations such as BRICS, ASEAN Regional Forum and Shanghai Cooperation Organisation. Meanwhile, tensions in the India-China border region have remained stable over the past three years after a deadly clash in 2020. But the threat of fresh conflicts will subsist unless the bilateral relationship improves. India has also deepened ties with Israel, reflected in its membership in I2U2 (Israel, India, United Arab Emirates and the US) and the India-Middle-East-Europe Corridor (IMEEC).

Last updated: January 2024

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.