Perspectives

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EcoPerspectives // 2nd quarter 2018  
20  
economic-research.bnpparibas.com  
India  
Dynamic momentum on the one hand, fragility on the other  
On the positive side, growth is accelerating rapidly and should return to levels close to the potential growth rate as of fiscal year  
018/19. Private investment finally seems to be entering a sustainable recovery. As part of a bank recapitalisation plan, public banks,  
2
whose asset quality has deteriorated further, received an injection of nearly USD 14 bn in March, which should help ease the  
pressures on the most fragile banks and bolster the rebound in investment. On the negative side, the government has taken a pause  
from the consolidation of public finances. The current account deficit has widened slightly, reflecting a deterioration in the terms of  
trade and a decline in export market shares.  
Economic growth acceleration and credit rebound  
1- Growth and inflation  
The economic recovery was confirmed in the third quarter of fiscal  
year 2017/18 (October-December 2017). Growth reached 7.2%  
year-on-year (y/y), bolstered by a strong increase in investment  
GDP Growth (%)  
 Inflation (%)  
Forecast  
.6  
7.4  
Forecast  
8
.0  
7
(
+12% y/y). Household consumption slowed for the third  
7.2  
6.6  
consecutive quarter as consumer prices rose and consumer  
confidence sagged in the year to November 2017. At the same time,  
public spending accelerated (+6.1% y/y). This increase does not  
reflect an increase in investment, but the compensation paid to the  
states as part of the goods and services tax. For the first time since  
fiscal year 2011/12, the government announced that it would miss  
its target and would not reduce the fiscal deficit for the year 2017/18.  
The deficit is expected to hold at 3.5% of GDP.  
4.9  
4
.5  
4.5  
4
.2  
3.6  
17  
1
5
16  
17  
18  
19  
15  
16  
18  
19  
Source : National accounts, BNP Paribas. Fiscal year from April N to March N+1.  
The acceleration of growth is good news, but the recovery of private  
investment is even more encouraging. For the third consecutive  
month, the production of capital goods (notably machinery and  
equipment) increased strongly in January (+14.6% y/y). Bank  
lending to companies also accelerated (+6.7% y/y) after bottoming  
out in May 2017, spurred by the recovery in corporate investment.  
2- GDP growth accelerated strongly in Q3 2017/18  
GDP (year-on-year in %) and contribution to growth (in percentage points)  
Real GDP (y/y)  Household consumption  Public expenditure  
 Investment  Change in inventory  Net exports  Statistical errors  
15  
Banks’ asset quality continues to deteriorate  
1
0
5
0
5
The quality of bank assets continued to deteriorate in Q3 2017,  
albeit at a slower pace. According to the IMF, non-performing loans  
increased 15.5% y/y in Q3 2017, after increasing by more than 56%  
the previous year. In its latest report on financial stability, the central  
bank estimates that for the banking sector as a whole, risky assets  
(
the sum of non-performing loans and restructured loans) amounted  
-
to 12.2% of loans outstanding. The share was 16.2% for public  
banks and 4.7% for private banks. Credit risk is still concentrated in  
industry, where risky assets amounted to 23.9% of loans  
outstanding, compared to only 6.9% in agriculture and 6.4% in  
services. The metal, construction and mining industries reported the  
highest ratios of risky assets. According to the central bank, more  
than 44% of loans granted to iron and steel companies are at risk.  
Risky loans continue to be concentrated in the hands of big  
companies, which account for 56% of loans granted, but 83% of  
doubtful debt.  
-10  
2013  
2014  
2015  
2016  
2017  
Source: CEIC  
days from the date of default to restructure failing loans of more  
than INR 20 bn (USD 306 million).  
To date, the monetary authorities do not esteem that sufficient  
provisions have been made to cover the assets at risk. Moreover,  
profitability has been negative since 2016 (ROA and ROE of -0.2%  
and -2% in Q3 2017), which means the situation is unlikely to  
improve in the short term.  
The monetary authorities expect banks’ asset quality to level off  
during fiscal year 2018/19. The central bank set up new measures  
at the beginning of the year to accelerate the process of cleaning up  
risky assets. The bankruptcy law adopted in May 2016 is now the  
only regulatory framework applicable for default resolution. All the  
other procedures have been eliminated. The banks will have 180  
To counter the deteriorating financial situation of public banks and to  
stimulate bank lending, the government announced a vast  
EcoPerspectives // 2nd quarter 2018  
21  
economic-research.bnpparibas.com  
recapitalisation plan in October 2017, the first tranche of which was  
paid in March.  
3
%
- Risky credits have increased in public banks  
of total loans outstanding  
First tranche of the bank recapitalisation plan was  
injected in March 2018  
Banking sector as a whole  Public banks  
In late March 2018, the government injected INR 881.4 billion  
nearly USD 14 bn) into India’s public banks. As part of this move,  
18  
16  
(
the government issued INR 800 billion in bonds and drew the  
remainder from the 2017/18 budget. The banks will receive another  
INR 1218.6 bn by March 2019 . In January, the government  
1
1
1
4
2
0
8
6
4
2
0
1
announced that the amounts allocated to each bank would depend  
on their respective needs, so that they would meet all of the Basel 3  
solvency criteria by 31 March 2019. The highest amounts will go to  
the most fragile banks, such as IDBI, State Bank of India and the  
Indian Overseas Bank. All in all, INR 2.1 trillion (USD 32 bn) will be  
injected into the Indian banking sector by March 2019, the  
equivalent of nearly 1.3% of GDP. This should be enough to cover  
future losses and to comply with the Basel 3 solvency ratios. Yet as  
the recent fraud at Punjab National Bank illustrates, the public  
banks are still shackled by shortcomings in terms of governance  
and internal controls. To offset these shortcomings, the authorities  
announced tighter supervisory regulations. Management will have to  
audit their financial results every quarter. Moreover, to reduce the  
risks of asset concentration, a limit of 25% was set per counterparty.  
This still seems to be very insufficient.  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
Source: RBI  
1
980-2011. To stimulate exports, the government announced last  
December that it was setting up an INR 54.5 bn programme to  
develop high labour intensive manufacturing exports (in order to  
boost employment). India has a comparative advantage when it  
comes to selling low tech but highly labour intensive products, such  
as textiles. Its export market share has tended to increase over the  
past ten years. To encourage the development of domestic  
production of products with high technology content, such as  
electronics, the government has raised import tariffs by 5 to 10  
percentage points.  
Current account deficits widened slightly in 2017  
In 2017, the structure of the balance of payments deteriorated  
slightly. Down by 0.7 points of GDP, net foreign investment no  
longer covers the current account deficit, which swelled slightly.  
Portfolio investment, in contrast, increased strongly to 1.2% of GDP,  
which was enough to cover the deficit of the basic balance. Foreign  
exchange reserves increased by USD 50 bn during the year.  
The current account deficit increased by 0.8 points to 1.5% of GDP,  
which is still far better than the 5.1% of GDP reported five years  
earlier. The slight deterioration resulted from a wider trade deficit,  
which rose to 5.9% of GDP, mainly due to a higher oil bill. Although  
exports swung back into positive growth in 2017, import growth was  
even stronger. So far, the increase in the current account deficit is  
not worrisome. India reported foreign reserves of USD 421 bn in  
March, which is equivalent to 1.8 times the country’s short-term  
financing needs.  
Over the past five years, goods exports have declined by  
4
.4 percentage points to only 12% of GDP. In comparison, exports  
by Thailand, Malaysia and Vietnam accounted for 54%, 70% and  
8% of GDP in 2017. The decline in Indian exports as a share of  
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GDP reflects the decline in the prices of metal, steel, iron and oil.  
The majority of Indian exports are either simple or transformed  
2
commodities . As a result, its share of the world market has  
stagnated at 1.7% since 2011, after rising strongly in the period  
1
INR 550 bn in government bond issues, INR 570 bn in funds raised on  
financial markets, and INR 98.6 bn that will be drawn from the 2018/19 budget.  
2
In 2016, the export market share of commodities and transformed  
manufactured goods amounted to 37.6% and 26.1%, respectively.  
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