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A new analysis of Asian economies by the International Monetary Fund once again shows the Indian economy will expand at a much faster rate than other major regional economies. It is also one of the few countries that is relatively insulated from the ongoing rebalancing of the Chinese economy towards higher consumption.
The optimism needs to be tempered with three data points that continue to be a cause for concern. India is a clear outlier when it comes to the fiscal deficit, inflation and bad loans. India does far worse on these parameters than the average Asian country. The trajectory of bad loans is the biggest risk to economic stability because the fiscal deficit is far lower than three years ago while headline inflation has nearly halved. Indian policy makers deserve credit for using the windfall from lower oil prices well.
The state of banks continues to be the biggest worry—and the capital adequacy of Indian banks is low compared to their Asian peers.