According to the Economic Survey 2023-24, the Geopolitical Risk Index, at 121.7 in 2023, was 27% higher than the average of nine years from 2011 to 2019, which was 95.2.
The Geopolitical Risk Index was significantly lower in 2023 at 121.7 points compared to 157.6 points in 2022. Equity investing geopolitical risks have declined in 2023 compared to 2022, but the Economic Survey warns that they remain high and could potentially worsen in the future.
What is Geopolitical Risk Index; how is it calculated
Geopolitical Risk Index is based on a tally of newspaper articles covering geopolitical tensions. Ten newspapers are considered. The index is calculated by counting the number of articles related to adverse geopolitical events in each newspaper for each month (as a share of the total number of news articles). A lower value indicates lower risk.
According to the Economic Survey data, “The geopolitical risk index, which spiked after the escalation of the conflict, declined thereafter. However, geopolitical risks are still high and persistent and may worsen in the coming months.”
Best performing among emerging markets in FY24
Economic Survey stated: “Despite heightened geopolitical risks, rising interest rates and volatile commodity prices, Indian capital markets have been one of the best performing among emerging markets in FY24, reflecting India’s bright economic stature. Capital markets are becoming prominent in India’s growth story, with an expanding share in capital formation and investment landscape on the back of technology, innovation, and digitisation. The following sections present the significant trends in primary markets, secondary markets, and institutional investment in India”
Adding further, “The escalation of the Red Sea crisis amid heightened geopolitical tensions in the Middle East in October 2023 led to supply chain disruptions, sending ripples to global trade and operations. The attacks on commercial shipping in the Red Sea led to increased global transportation costs, reflecting the rerouting of cargo. However, the increase in supply chain pressures was transient and modest. Similar sentiments were reflected in the softening of risk perceptions.”
Importance of geopolitical risk index
Political, social, economic, or military conflicts can give birth to geopolitical risk, which has the potential to destabilize financial markets or impact investment performance. Increasing limitations brought on by international tensions can sabotage trade and create issues with supply chains, even in nations that are not parties to the transaction.