Third-Quarter Forecast 2016: South Asia

Jul 11, 2016 | 09:32 GMT

As the name of India's summer session implies, the annual monsoon typically arrives during the third quarter.

In India, Tax Reform Will Dominate 'Monsoon Session'

New Delhi will probably bring an amendment to the Goods and Services Tax Bill to a vote in the upper house of parliament during the late July to mid-August Monsoon Session of parliament. If passed, this would create a single tax regime for all India. Amending the bill is the first step in a lengthy legislative process toward implementing the overall tax reform, which is intended to improve tax collection, promote consumption and boost economic growth.

The opposition Indian National Congress party, the largest voting bloc in the upper house, has so far blocked the bill. Congress' opposition to the measure stems from the ruling Bharatiya Janata Party's (BJP) refusal to agree to three amendments. These amendments would cap the tax rate at 18 percent, create a dispute resolution mechanism for resolving tax disputes that empowers the states and impose a 1 percent interstate tax.

Rather than agree to the Congress party's demands, Finance Minister Arun Jaitley has sought to woo regional parties away from Congress' coalition using incentives such as offering states tax reimbursements for up to five years of lost tax revenue. Its overtures have won support from across the political spectrum, including ideological rivals on the left such as West Bengal's All India Trinamool Congress and Uttar Pradesh's Samajwadi Party.

As a result, the BJP is better positioned than ever to marshall the two-thirds of parliament it needs to win passage of the amendment. Even so, the Congress party might be able to thwart passage by causing disruptions in the chamber, such as shouting and sit-ins. By leaving Congress few allies on the issue beyond the All India Anna Dravida Munnetra Kazhagam (AIADMK) party, which represents the southern state of Tamil Nadu, the BJP has limited its ability to block the bill.

Indian monetary policy probably will remain steady in the new quarter even though Reserve Bank of India Gov. Raghuram Rajan — who will chair the bank's August policy meeting — is stepping down in September. With the implementation of land, labor, and tax reforms unlikely this quarter, the government will turn to monetary policy to boost growth, meaning it probably will choose a successor to Rajan willing to contemplate deeper rate cuts.

As the name of India's summer session implies, the annual monsoon typically arrives during the third quarter. If this year does see rains that are heavier than normal, a more abundant October harvest can be expected. Either way, the country's 5.76 percent inflation rate will not be affected this quarter.

In the wake of the United Kingdom's referendum on leaving the European Union, India expects rising compliance costs for the more than 800 Indian-owned firms in the United Kingdom. These companies now will have to ensure regulatory compliance in both the United Kingdom and the European Union. The Brexit will also compel India to negotiate a free trade agreement with the United Kingdom separate from the one it is currently negotiating with the European Union. It also has implications for India's IT service exports, one-sixth of which go to the United Kingdom.

At 7.6 percent, India's growth rate is the fastest among the world's major economies. Recently released government data, however, shows jobs growing at the slowest pace since 2009, suggesting India's growth is capital intensive rather than labor intensive. Indian Prime Minister Narendra Modi's recent decision to relax foreign direct investment requirements across the insurance, aviation, retail, and defense sectors is a bid to promote job growth. The executive measures Modi used to relax those requirements will expire, however, unless parliament approves them, something he hopes will happen during the Monsoon Session. This quarter will likely see an uptick in consumption, since New Delhi approved a 23 percent pay increase for 10 million federal employees and pensioners.

Conflict and Cooperation on the Afghan-Pakistani Border

The Pakistani military will continue the last phase of anti-militant Operation Zarb-e-Azb in the northwestern region of North Waziristan, prompting militants to launch sporadic retaliatory attacks against soft targets throughout Pakistan. Meanwhile, Afghan-Pakistani ties will continue to be strained as Islamabad forges ahead to secure the shared 1,370-mile (2,204-kilometer) border by installing checkpoints and continuing work on a trench along its entire length roughly four meters deep and four meters wide. By securing its western border, Pakistan can demonstrate its leverage over landlocked Afghanistan, which relies on supply routes crossing through Pakistan. NATO will maintain a presence in Afghanistan through 2020. The Taliban insurgency will sustain its vigor throughout the fighting season, ensuring that a steady stream of Afghan migration into Europe continues.

In response to Pakistan's border security moves, Afghanistan will enhance its cooperation with India on building the Chabahar Port in Iran to diversify its trade routes. Kabul, which also fears Pakistan could deport Afghan refugees, will work to ensure relations with Islamabad do not worsen ahead of talks at the United Nations in July to discuss the future of Afghan refugees in Pakistan. For its part, Washington will work to improve its strained relationship with Islamabad to help jump-start peace talks with the Taliban suspended by Pakistan in the aftermath of the U.S. attack that killed Taliban leader Mullah Mansour in Pakistan. Indo-Pakistani ties will remain weak but stable as both nations jockey to gain entrance into the Nuclear Suppliers Group

Fallout from the Panama Papers scandal will continue in Pakistan. Since the opposition cannot even agree on how to proceed with an investigation, it is unlikely that Prime Minister Nawaz Sharif will be forced to resign this quarter. Sharif's delaying tactic is apparently working, so we can expect more of the same from the ruling Pakistan Muslim League (Nawaz). Islamabad will continue to try to distract the public from the issue by pointing to the government's successes in combatting terrorism and in attracting foreign investment for development projects related to the China-Pakistan-Economic-Corridor.

Afghanistan's National Unity Government led by President Ashraf Ghani and Chief Executive Abdullah Abdullah is due to implement electoral reforms in the coming months. A string of challenges including a gridlocked parliament suggest Kabul will not achieve its objectives this quarter, thereby threatening to delay parliamentary and district council elections scheduled for Oct. 15. A loya jirga in September to debate a constitutional amendment aimed at converting Abdullah's role into that of a prime minister is unlikely despite an agreement between Ghani and Ashraf to hold one. The National Unity Government is also likely to extend its term through the end of the quarter even as rivals challenge its legitimacy.

Attacks in Bangladesh Will Continue

Despite Bangladeshi Prime Minister Sheikh Hasina's launch of a nationwide crackdown resulting in 18,000 arrests, her boldest effort at stamping out militancy, sporadic attacks will persist. Hasina will blame her political rivals, the Bangladesh Nationalist Party and the Jamaat-e-Islami, for the attacks, using them as a pretext to marginalize them.

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