India

Domestic demand key to 2023 growth

Reopening after Covid-19 was a major positive catalyst for India’s growth in 2022, leading to a shift in growth momentum from goods to services. This trend was most obvious in private consumption (~60% of GDP), which contributed over 80% to GDP growth in the first three quarters of 2022, compared to 60% in the previous year. This was also clearly seen in retail services - a contact-intensive sector - with GDP data showing that the pace of growth in the trade, hotels and transport industry accelerated to nearly 14% y/y in the same period. Fixed investment (29% of GDP) rose again in 2022, although the contribution to growth was notably smaller than in the previous year. Net exports meanwhile was a larger drag on GDP due to the adverse shock in terms of trade caused by the surge in input and commodity prices.

A global slowdown, and further normalisation of domestic fiscal and monetary policies will weigh on India’s growth outlook in 2023. However, we expect the Indian economy to continue expanding at a robust pace, supported by domestic demand. Consumption recovery is expected to continue, helped by improving urban employment, and a potential uptick in rural income linked to larger rabi crops). Easing inflationary pressures will also benefit household purchasing power.

The central government’s continued emphasis on infrastructure investment through flagship programmes such as the National Infrastructure Pipeline and the National Logistics Policy will play a larger role in the country’s capital spending in 2023. Central government capital expenditure (capex) jumped 50% y/y to 3.42 trillion rupees in the April-September 2022 period, and a further increase was announced in the FY2023-24 budget in February 2023. 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. Private companies are also in a stronger financial position to raise capex after years of deleveraging and a boost in profits during the pandemic, which pushed corporate debt (52% of GDP in Q3 2022) to its lowest level since 2005. Conversely, goods and services exports face a challenging outlook in 2023 as growth is expected to slow markedly in advanced economies. This means that the net exports’ drag on GDP will likely widen and weigh on India’s growth momentum.

Narrowing the twin deficits

Slower growth and lower energy prices will help to narrow the current account deficit in 2023. The moderation in imports will likely be sharper than the slowdown in export growth, which is expected to be cushioned by resilient services exports. The current account deficit widened to 2.7% of GDP in the first nine months of 2022, due mainly to a sharp widening of the merchandise trade deficit to 8% of GDP, on back of sharply higher import values, and continued net outflows from the primary income account, reflecting payments of foreign investment income. Strong growth in the services trade balance (3.7% of GDP), on the back of rising exports of software, business and travel services, helped to partially ease the current account deficit.

Fiscal consolidation should continue, with the central government committed to bringing the budget deficit down to -6.4% of GDP in FY2022-23. Strong revenue, helped by rapid formalisation of the economy and windfall tax from excise fuel duties, partially offset a larger subsidy spending, and an increase in capex allocations. More careful targeting of subsidies and additional revenue generation (new taxes or asset sales) will be necessary to achieve a longstanding plan to narrow the fiscal deficit to -4.5% of GDP by FY2025-26.

Inflation and monetary policy

Headline inflation peaked in September 2022 and has begun to ease. The country is likely to have seen the worst of food inflation following a predicted strong 2023 harvest, and softening global food prices in the final months of 2022. Core inflation, however, is likely to be slower in catching up due to the delay in passing on higher costs and in the uptick of the services sector.

Inflation remains elevated despite interest rate hikes of 225 bps by the Reserve Bank of India in 2022, and moves to tightening liquidity. This implies the rate hike cycle has a little further to run, though the central bank is likely to be close to a pause in the latter half of 2023, especially if core inflation slows.

Stable political outlook

The ruling Hindu nationalist Bharatiya Janata Party (BJP) won four out of five state elections in March 2022, and secured a landslide victory in Gujarat in December 2022, the home state of prime minister Narendra Modi. This places the BJP well ahead of competition at the next general election that needs to be held by May 2024. The dominance of the BJP has been helped by the fragmentation of the opposition, particularly the Congress Party, at both the national and local levels.

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

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.

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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.

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Last updated: September 2023