India Defence and Security Report Q1 2010

Over the forecast period, India arguably faces greater security challenges from non-state actors than from traditional rivals such as Pakistan or China. Quite aside from the conflict in Kashmir, which involves a number of non-state armed groups, as well as the armies of Pakistan and India, India faces challenges on three fronts. First, various groups within India - of which the Naxalite/Maoists in the north of the country are most important - are engaged in disputes that have nothing to do with Pakistan. Secondly, various groups within Pakistan are in conflict with the government of that country. In general, these groups’ disputes have nothing to do with India. However, in the event that the government of Pakistan completely lost control of the country, millions of refugees could cross the border into India. Thirdly, a deterioration of the security situation in Afghanistan could have consequences for Pakistan - and consequences that could spill over into India. A fourth threat presented itself starkly in November 2008, with attacks in Mumbai that killed at least 173 people. The only terrorist who was captured alive disclosed that the attackers were members of a Pakistan-based militant organisation.

New Delhi is currently preparing to launch a large-scale offensive against the Naxalite (communist rebel) insurgency in a bid to prevent additional damage to the investment appeal of India's poorer eastern regions. The stakes are high, however, and we are worried that heavy-handed tactics could provoke even more rural unrest, playing into the hands of the Naxalites. From our perspective, the long-term solution must lie with encouraging inclusive economic growth in order to prevent a further widening of regional income disparities.

A host of macroeconomic data released on 1 September reinforce our view that India's road to economic recovery will be rocky and gradual. While a poor monsoon is raising risks to agricultural output and private consumption, we believe this will be offset by a nascent recovery in manufacturing and strong government expenditure underpinning the service sector. We thus maintain our 6.1% GDP forecast for FY2009/10 (April-March).