Two-thousand and sixteen ushered in an uncertain economic climate in many parts of the world, but the prospects for India look strong. However, the country must keep spending in check and continue along its reform path if it is to remain 'the last BRIC standing'. 

As we start 2016, the outlook is gloomy on many fronts – poor economic prospects in the eurozone, and continuing worries over China and outflows of capital from emerging markets in general. The one bright spot is India, whose economy is expected to grow at 7.5% this year, rising to 8% in 2017.

India has two big advantages in the current economic climate – as an oil importer it benefits from falls in this and other commodity prices (unlike fellow BRICs Brazil and Russia) and as a latecomer to globalisation it plays little or no part in Asia’s supply chains. Bilateral trade between India and China is only 3.6% of India’s exports.

The Banker made the governor of the Reserve Bank of India, Raghuram Rajan, our central banker of 2016 in recognition of his efforts to stabilise the rupee and tame inflation. 

But if India wants to remain as 'the last BRIC standing' it cannot afford to rest on its laurels. The easy wins of commodity price falls and accommodative monetary policy are one offs and any future success will depend on its ability to carry out long overdue reforms. 

In this respect, the picture is more mixed. Government reforms to the business environment and foreign direct investment rules have been implemented but pushing more far-reaching changes, such as a goods and services tax, through the upper house of the Indian parliament is proving more difficult. 

In confirming its BBB rating with 'stable' outlook, Fitch notes that India’s debt-to-gross domestic product ratio of 67% is higher than the BBB median of 43%, and the expected fiscal deficit in 2016, at 6.7%, is well above the peer median of 2.8%. 

So India has more work to do and limited room to manoeuvre. Up until now, the government has gained savings through lower oil subsidies and it has managed to spend this money wisely by raising capital expenditure rather than current spending. But economists are divided as to whether this will continue, given a pay commission recommendation that central government employees receive a 23.6% pay increase. 

“[This] raises doubts about the feasibility of the medium-term consolidation path without any new revenue-generating measures,” says Fitch. But a HSBC report says the reform has the potential to “raise consumption in an orderly manner, reduce slack in the economy and incentivise investment over time”. 

Still, India is expected to be a more attractive destination for capital flows than most given that the Institute of International Finance (IIF) reports that 2015 saw emerging market portfolio inflows of only $41bn. This was the worst year since the financial crisis, with inflows down 85% on the 2010 to 2014 average, according to the IIF. 

Brian Caplen is the editor of The Banker.

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