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Global growth remained stagnant at 3.1%. On the global level, while the advanced economies' performance eased modestly in 2016 when compared to 2015, the emerging market and developing economies performed somewhat better. The US experienced a lower GDP growth since 2011, thereby, acting as a drag on the overall advanced economies' growth. UK slowed down against the backdrop of weaker net exports. Euro Area as a whole, however, registered a tad higher growth in 2016 when compared to 2015. Meanwhile, higher capital expenditure enabled Russia to come out of recession in Q4 2016, thereby pulling up overall growth of emerging and developing countries (4.1% in 2016).

Despite some headwinds, global economy has been recovering in 2017, with performance improving specifically amongst the advanced countries. Moreover, economic performance of Euro area is also showing an uptick with various indicators, including unemployment rate and factory output refiecting the improving dynamics this year. Activity in Japan has also surprised on the upside with pick-up in industrial output and exports. Though the US GDP growth eased in Q1 2017, the good thing is that a possible fiscal stimulus is expected to provide a push to economic growth.

Among the emerging and developing world, China continues to grow moderately with persistent support from the authorities. However, recently Moody's Investor's Service downgraded China to A1 from Aa3 and changed its outlook to stable from negative. The rating agency attributed this decision to expectations that China's economy-wide leverage would increase further over the coming years, planned reform program would likely slow down, but not prevent the rise in leverage, and sustained policy stimulus would cause rising debt across the economy.

Economic activity in India is expected to recover past the slowdown due to demonetisation.

The global trade slowed down to 2.2% in 2016 owing to sluggish investment and inventory adjustment. However, it is likely to benefit from expected increase in global demand, albeit increasing protectionist policies remain a matter of concern. The overall world GDP is expected to grow by 3.5% in 2017. However, deepening geo-political tensions in the Middle East and North Africa region, faster than expected Fed rate hike and increase in protectionism policies by the advanced economies are the key risks that can put downward pressure on global economic activity.

Another aspect that infiuences global growth is crude oil price, which has plummeted in recent weeks to go below $50 per barrel. The sharp fall is driven by the market's deeper worry that OPEC's steps of a production cut may worsen structural imbalances. OPEC and other major producers had been enjoying higher prices since agreeing in November to slash production, a strategy designed to rid global markets of excess supply. Going forward, it is expected that dynamics of crude oil price will be driven by decision of Saudi Arabia and other OPEC members to implement production cut for at least 12-18 months to reduce the inventory glut.


After witnessing demonetisation in FY2017, the Indian economy is going to see another major reform in the form of implementation of GST in FY2018. India's GVA growth, which is expected to expand by 6.7% in FY2017, is set to increase in the range of 7.4% in FY2018 (RBI estimates) due to accelerated pace of remonetisation, stepping up of capital expenditure, boosting of the rural economy, demand for afiordable housing, a normal monsoon and roll-out of GST by July 2017.

Indian Meteorological Department (IMD) has forecasted that this year monsoon would be "Normal" or around 96% of Long Period Average (LPA) with an error of 5% and with a fair distribution of rainfall across major parts of country. If the forecast holds, it will boost rural demand and also alleviate rural distress.

As a result of very good rainfall during monsoon 2016 and various policy initiatives taken by the Government, the country has witnessed record foodgrain production in FY2017. As per Third Advance Estimates for FY2017, total foodgrain production in the country is estimated at 273.38 million tonnes, which is higher by 8.34 million tonnes than the previous record foodgrain production of 265.04 million tonnes achieved during FY2014 and significantly higher by 21.81 million tonnes than the last year's foodgrain production.

Both Wholesale Price Index (WPI) and Consumer Price Index (CPI) infiation have remained under control throughout FY2017. CPI infiation declined significantly from a high of 9.9% in FY2013 to 4.5% in FY2017. The infiation trajectory will remain in the range of 4-5% for the next 2 years with the possibility of a downward bias, thanks to Government initiatives, adoption of infiation targeting framework by RBI and constitution of MPC.

Based on new base year (2011-12), Index of Industrial Production (IIP) grew by 5.0% in FY2017 compared to 3.4% in FY2016, hence defying the negative impact of demonetisation. The manufacturing sector, which has been the most volatile, grew by 4.9% in FY2017 as against 3.0% growth in FY2016. Mining and Electricity grew by 5.3% and 5.8%, respectively in FY2017.

The year-wise number of investment proposals (greenfield as well as brownfield) on a calendar year basis as depicted under IEMs (Industrial Entrepreneurs Memorandum excluding Direct Industrial Licenses) grew from 1,909 in 2015 to 2,256 in 2016 - a growth of 18%. From January-March 2017 the number of investment proposals was 557 as against 543 in January-March 2016. In value terms, the proposed investments (excluding Direct Industrial Licenses) for calendar year 2016 were Rs 4,10,422 crore (Rs 3,07,357 crore in 2015) – depicting a growth of more than 33%. Key sectors which attracted investments include Electrical Equipment, Transportation, Metallurgical industries, Chemicals (except Fertilisers), Cement and Textiles.

On the external front, the current account deficit (CAD) has been narrowing down progressively from 1.7% of GDP in FY2014 to 1.1% in FY2016 and is expected to improve further. The contraction in the CAD was primarily on account of a lower trade deficit brought about by a larger decline in merchandise imports relative to exports. India's export growth, which was in negative territory in the first half of FY2017, rebounded significantly in the second half and recorded a growth of 27.6% in the last month of FY2017. Imports also indicated a similar trend.


Since the global financial crisis (GFC), leading Asia Pacific Region (APR) banks have outperformed the global banking sector. The region is already witnessing new types of competitors from the rapidly-developing Fintech sector and mega banks rising across the region (the recent SBI merger) enabling banks to operate more easily across borders.

Meanwhile, in FY2017, Indian banks remained in the limelight, initially due to the lingering asset quality issues and thereafter due to demonetisation. In H1 FY2017 for All Scheduled Commercial Banks (ASCB), both deposits and advances growth remained subdued and were moving in the range of 8-11%.

On 08 Nov 2016, Honourable Prime Minister demonetised the high value Rs 500 and Rs 1,000 notes, which amounted to Rs 15.44 lakh crore (86% of the value of the total amount of currency in circulation). The concerted efiorts by banks helped the Government to smoothly surpass the 50-days' time period given to deposit/change the demonetised notes. Demonetisation led to increase in deposits of the banks. The fortnightly data of ASCB indicates that aggregate deposits increased by 11.8% in FY2017, after declining in the last three years. Meanwhile, credit ofi-take (YoY) declined to a 63-year low of 5.1% in FY2017 compared to previous year's growth of 10.9%. The decline in credit is mainly due to low demand for credit from the corporate sector. There has been a shift of loan demand from the better rated entities to the bond market as yields ofiered in the primary markets have fallen below the base rate for certain maturities. Thus, incremental lending during the financial year has been mostly to the personal loan segment, especially Housing and other personal loans. Interestingly, banks have surpassed the target of Rs 1.80 lakh crore of Mudra loans in FY2017 by sanctioning Rs 1.81 lakh crore to 3.97 crore accounts. In the last 2 years, banks have given Mudra loans to 7.46 crore MSME units. Thus, with the thrust of the Government and efiorts by banks, Mudra loans now account for around 2% of the ASCB loan portfolio.

In the post demonetisation period (11 November 2016 to 31 March 2017), aggregate deposits have increased by Rs 7.4 lakh crore, while credit ofi take during the same period has increased by Rs 5.5 lakh crore. The huge infiow of deposits has pushed the share of CASA deposits in aggregate deposits by around 4 percentage points relative to the pre-demonetisation period. As the limits on withdrawals have been removed, people have started withdrawing their deposited money gradually.

Following the surfeit of liquidity and low credit growth, SBI has taken the lead (and followed by other banks) by slashing the MCLR rate by 90 bps to 8.0% on 01 Jan 2017. Following SBI, a number of public and private sector banks have reduced their MCLR in the range of 10-85 bps.

The process of demonetisation has opened up huge potential for digital channels. There has been a significant jump in transactions in all digital modes of payments like PoS, m-wallets, mobile banking, IMPS and UPI. The debit + credit card transactions at PoS increased to Rs 686 billion in March 2017 (with peak reached in December 2016 at Rs 892 billion), compared to merely Rs 519 billion in October 2016. Also, the number of PoS terminals has increased from 14.0 lakh in April 2016 to 25.3 lakh as of March 2017. Just in a period of 5 months (November-March), Indian banks have been able to set up 10.2 lakh PoS terminals, almost 6,700 PoS terminals per day. The size of digital banking (including credit card + debit card transactions through PoS terminals, transactions through Prepaid Payment Instruments like m-Wallet, PPI cards etc. and mobile banking) has increased to around Rs 2,500 billion from Rs 950 billion in April 2016, with the lion's share captured by SBI.

State Bank of India has merged its five associate banks and Bharatiya Mahila Bank with itself from 1 Apr 2017. This is the first such large scale consolidation in the Indian Banking industry. With this merger, SBI has entered into the league of top 50 global banks (up from 55th position in 2016, Source: The Banker, July 2016) with a balance sheet size of Rs 33 lakh crore, with 24,017 branches and 59,263 ATMs servicing over 42 crore customers. The increased balance sheet size will enable the bank to command better terms in both international and domestic markets. The added branch network, customer base and stafi strength will help it expand reach and enable the bank to rationalise resources and redundancies across the board. The Bank's endeavour will be to optimise costs and maximise revenues through the merger synergies, leading to significant cost savings and reduction in cost-to-income ratio.

Meanwhile, under the Pradhan Mantri Jan Dhan Yojna (PMJDY), banks have opened 28.6 crore of accounts with Rs 64,365 crore deposits till 17 May 2017. In FY2017 alone, banks have opened 6.7 crore Jan-Dhan accounts, out of which 2.6 crore accounts were opened in the post demonetisation period. On a positive note, zero balance accounts under PMJDY have been continuously declining from 45% in September 2015 to 24% in March 2017.

Recently, RBI released a discussion paper on a new category of banks - wholesale and long-term finance banks, which will fund large projects. These banks will be focusing primarily on lending to infrastructure sector and small, medium & corporate businesses. They will also mobilise liquidity for banks and financial institutions directly originating priority sector assets, through securitization of such assets and actively dealing in them as market makers.

The stress in asset quality of Indian banks continued to remain elevated in FY2017. Due to a high proportion of NPAs, net profits of most banks have declined as a result of higher provisioning. This in turn has impacted their return on assets (RoA) and return on equity (RoE) adversely. However, all possible solutions for resolution of stressed accounts are being worked out by the Government, RBI and the banks. The recent promulgation of the ordinance giving greater powers to RBI is a novel step to tackle the problem of asset quality. The ordinance has a provision under which the Government may authorise RBI to issue directions to any banking company to initiate insolvency in respect of a default under the provision of the Insolvency and Bankruptcy Code, 2016. It also has provisions for empowering the RBI to issue directions to banking companies for resolution of stressed assets. Further, measures like forensic audit in those accounts where there is lack of cooperation, operationalising commercial division of high courts, implementation of bankruptcy code among others are also likely to have a positive impact on the asset quality of banking system.

Meanwhile, Indian banks will need recapitalisation even as asset quality improves over medium term. Empirical evidence suggests that there are definite scale economies in banking when recapitalisation is introduced.

The interesting part is that as per the limited information available in public domain, China had injected $127 billion into their banking system during 2004-07, while the US Fed injected $2.27 trillion following the 2008 crisis. In contrast, during the period FY2006-FY2017, cumulative capital infusion into PSBs in India was at $17 bn.


The year 2017 will be the most crucial in the second decade of the 21st Century. The pressurepointssuchassluggishimprovement in economic conditions worldwide, structural unemployment, underutilisation of capacity, growing digital trades, labour saving technology and geopolitical confiicts have reached a critical mass. Protectionism is on the rise in the US and EU and financial stability will be under stress in the EU. These factors will create a band of uncertainty around the global growth outlook in 2017, which is largely positive. The financial markets may, therefore, witness uncertainty during this year and beyond.

While the political discourse worldwide may indicate a decline in globalisation trends, the growing digital fiows have become a new form of globalisation and the appreciation of this fact will take some time to percolate. The expansionary nature of global value chains that marked the liberalised regime in 1990 will now give way to more localised production. It is in this context that India is hoping to revive its growth prospects.

In the coming year, India's economy will have many challenges to surmount. The protectionism of the West may constrain our ability to cater to export markets. The economy's employment generating potential needs a further thrust. Doubling of farm incomes to support the aggregate demand needs to be pursued with full sincerity without hurting financial stability. Critical infrastructure such as internet connectivity, regional air connectivity, rail connectivity, water conservation and port connectivity need push on war footing. National Policy on Standards has waited too long and must be drafted and implemented at the earliest to realise the full potential of ‘Make in India'. The implementation of GST, paving the way for a unified national market in goods and services, must reach its logical conclusion during this year. The Government has set a target to construct as many as 12 lakh houses under Pradhan Mantri Awas Yojana (Urban) in FY2018. This scheme was launched in 2015 to ensure housing for all by 2022. However, the Government has to overcome the challenge of land acquisition to successfully achieve this target.

India's growth fundamentals continue to remain intact. Low infiation, good agriculture growth and declining power shortages are indication towards a bright future. Thus, the time is opportune to take a decision on the Second Generation Reforms encompassing vital sectors such as banking, bureaucracy, judiciary and industry. The first generation of reforms has completed 25 years and the law of diminishing returns has now set in preventing a full scale revival. The consolidation in banking with mergers of Associate Banks may set a template for future consolidations. However, this needs to be supplemented with better HR practices to boost productivity, much higher standards of customer servicing and enduring value creation through judicious use of technology.

Overall, both monetary and fiscal policy will be conducive for stable economic growth. Even if the monetary policy is in neutral mode, ample liquidity post demonetisation will keep the interest costs down. Consolidation in the fiscal space will make room for private investment. We do not see any material departure from either the monetary or fiscal policy stance in the current fiscal.