India Economic Outlook

March 2018
 India Economic Outlook

State of the Economy:

India Outlook

Introduction
The year 2017 was marked by a number of key structural initiatives to build strength across macro-economic parameters for sustainable
growth in the future. The growth in the first half of the year suffered despite global tailwinds. However, the weakness seen at the beginning
of 2017, seems to have bottomed out as 2018 set in. Currently, the economy seems to be on the path to recovery, with indicators of
industrial production, stock market index, auto sales and exports having shown some uptick (shown below). We believe that India’s
economic outlook remains promising for FY17-18 and is expected to strengthen further in FY18-19. However, the signs of green shoots
should not be taken for granted as downside risks remain.

Production prints on an upswing (3mma, y-o-y, %)

Industrial Production
Manufacturing
Capital Goods Production (RHS)

8 14

7 12

6 10

5 8

4
6

3
4
2
2
1
0
0
May-17
May-16

Mar-17

Nov-17
Sep-17
Nov-16
Sep-16

-2
Mar-16

Jan-18
Jan-17

Jul-17
Jul-16

-1
Jan
-16

-4
-2

-6
-3

-4 -8

-5 -10

Source: CEIC, Deloitte

01
India Economic Outlook

Movement of Nifty (2015 - 2018) Rural sector shows some uptick (3mma, y-o-y, %)
Motor Vehicle Sales
Passenger Vehicles
12,000
35 Two Wheelers

11,000 30

10,000 25

9,000 20
8,000 15
7,000 10
6,000 5
5,000 0
Mar

12-Mar-16

12-Dec-17

12-Mar-18
12-Dec-16
12-Jun-16
12-Jun-15

12-Dec-15

12-Jun-17
12-

-15

12-Sep-

Nov-17
12-Sep-
12-Mar-

Aug-17
12-Sep-

Feb-18
Oct-17

Jan-18
Dec-17
Jul-17

Sep-17
15

17

17
16

Source: CEIC, Deloitte Source: CEIC, Deloitte

Trade activity seeing some rise (3mma, y-o-y, %)

Trade Balance (USD bn)

Imports (%)
Exports (%)

50 -16

-14
35

-12

20
-10

-8
5

-6

-10
-4

-25 -2
May-17
Feb-16

May-16

Aug-16

Nov-16

Mar-17

Sep-17
Apr-16

Feb-17
Sep-16

Dec-16

Aug-17

Dec-17
Mar-16

Jun-16

Jan-17

Jan-18
Oct-16

Apr-17

Jun-17

Jul-17

Nov-17
Jul-16
Jan-16

Oct-17

Source: CEIC, Deloitte

02
 India Economic Outlook

The biggest challenges for 2018 are as to how the economy can maintain its recovery in the face of increasing
inflationary pressures, coupled with a higher fiscal deficit as well as an increasing debt burden. The key to this
conundrum lies in the revival of consumer demand and private investment.

Private Consumption and Capital Formation (y-o-y, %) Crude Prices (USD/Barrel, Average)

12 Private Consumption
Capital Formation
18 80 ~ 75

10 16 70
14 60 55.5
8 12 47.3 48.5
50
10
6 40
8
30
M
D

D
S

S
e
p

1
6

1
6

1
7

u
n

1
7

e
p

1
7

1
7
c

c
-

r
-

4 6
4 20
2
2 10
0 0 0
2015-16 2016-17 2017-18 2018-19
Jun-16

Dec-15
Sep-15

Dec-14
Sep-14
Mar-16

Mar-15
Jun-15

Jun-14

Source: CEIC, Deloitte Source: CEIC, Deloitte

The objective of this paper is to present an analysis of the current Indian economic scenario along with the expectations from the period
ahead.

Decoupled, but still one of the fastest growing economies:

Over the last few quarters, what has become increasingly evident is the divergence between Indian and global growth. This decoupling
largely happened as India’s growth was hit on account of mega policy announcements.

India - World Decoupling (GDP, %)

World GDP
India GDP
12

10

0
2019
198

199
19
83

19
86

19
89

19
92

19
95

20
01

20
04

20
07

20
10

20
13

20
16

-2
0

Source: IMF, Deloitte

03
India Economic Outlook

One of the other reasons for this can
possibly be attributed to shifting real
interest rate trends. During 2016, India’s
real interest rates followed a downward
global trend. However after this the rates
started shifting upwards which affected
investment activity, led to currency
appreciation and resulted in subdued
export activity.
In contrast to the economic situation in
India, global economic conditions have
gained momentum and have possibly
created a ripple effect across regions.
International Monetary Fund (IMF) has
estimated global growth to have grown
faster at 3.7% in 2017 against what was
earlier projected, with revival largely
apparent across Europe and Asia1. With
broad based recovery on the cards,
global growth forecast has been moved up
by 0.2 percentage points to 3.9% for 2018
and 20192.
Growth outlook for the US has been
estimated to be positive due to
improvement in domestic demand as well
as the anticipated boost to the economy by
way of U.S. tax policy changes. Across
other developed economies, the Euro area
saw further expansion on the back of falling
unemployment rates, investment optimism,
and lower interest rates which have
stimulated consumption further, while the
effects of strong external demand were
visible in Japan where manufacturing
activity moved to the upside.
Looking ahead, for 2018, it is widely
expected that this decoupling will not
continue. As per IMF and World Bank,
world economy is expected to grow at
3.7% and 3.1%3 in 2018 while the Indian
economy is expected to grow at 7.4% and
7.3%, respectively4 for 2018. We expect
India to grow by 6.7% in FY2017-18 and
further by 7.2% in FY2018-19 on account of
uptick in investment activity and broader
market adjustments to previous market
disruptions. Currently, India is the world’s
seventh-largest economy at USD 2.2 trillion,
sitting between France and Italy. A report
by World Economic Forum has projected
that by 2050, the Indian economy is
expected to be the world’s second-largest,
behind only China.

GDP Trends (Top FDI Destinations, CY, y-o-y)

20
China Germany Hong Kong SAR
India United Kingdom United States

15

10

-5
2022
200

200

200

200

200

201

201

201

201

201

201

201

201

201

201

202

202
5

-10

Source: World Bank

1. https://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018
2. https://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018
3. http://www.livemint.com/Politics/EykbGSLQXmXFGiPN3SzOsK/IMF-cuts-Indias-2017-growth-forecast-but-sees-medium-term.html
4. http://www.worldbank.org/en/publication/global-economic-prospects

04
 India Economic Outlook

GDP Trends (Key EMs, CY, y-o-y)

20
Brazil China India
Indonesia Russia Thailand
15

10

-5

2022
-10
200

200

200

200

200

201

201

201

201

201

201

201

201

201

201

202

202
5

1
Source: World Bank

05
India Economic Outlook

Top 10 largest economies (GDP, USD trillion, 2015)

0 5 10 15 20

US 18

China 11

Japan 4.4

Germany 3.4

UK 2.9

France 2.4

India 2.2

Italy 1.8

Brazil 1.8

Canada 1.6

Source: World Economic Forum, Deloitte

Recent GDP Trends

The recent data on GDP growth in Q3 of FY 2017-18 has again revived expectations that the deceleration in the economic activity
because of GST and demonetization may have bottomed out. Some of this good news is also mirrored in the data on corporate earnings
as well. Even with the slowdown in 2017, recent data suggests that the GDP has grown by an average of 6.4%5 in the first three
quarters of FY17-18.

GDP Growth Rates (y-o-y, %)

GDP: Constant Private Consumption
Capital Formation Govt Consumption

25 10

20 7.2 8
6.7

15 6

10 4

5 2

0 0
Sep-

Dec-

Mar-

Dec-
Sep-
Dec-

18[E
Sep-

Mar-

Jun-

FY1
Jun-
Jun-15

16
15

15

FY18-19[E]
17
17
16

17

17
16
16

7-

Source: CEIC, Deloitte

5. CEIC Data and Deloitte Analysis

06
 India Economic Outlook

GVA Quarterly growth rates (y-o-y, %)

GVA: Constant Agriculture, Forestry and Fishing

14 Industry Services

12

10 8.8 8.3
7.8
8 8.5 7.2
7.4 6.9 6.0 6.2 6.7 6.1 6.9
5.6
6
4
2
0

-2
Mar-16
Sep-15

Dec-15

Mar-17
Sep-16

Dec-16

Sep-17

Dec-17
Jun-16

Jun-17

FY17-
-4

FY18-
18[E]

19[E]
Jun-15

Source: CEIC, Deloitte

As can be seen from the above, the services sector

continued to show a stable rate of growth. The
agriculture sector suffered from a price crash
following over-production during the kharif season,
while erratic monsoon during the latter part of the
year led to some crop destruction resulted in falling
farm incomes. Looking ahead, the agriculture
segment is expected to grow higher than the
estimated 2.1% in the current fiscal possibly
following positive prospects on rabi harvest.

Moreover, some improvements on the industry

sector emanatd from a steady rise in utilities and a
revival in manufacturing activity. Industry growth
recorded a further upswing from 5.9% in 2QFY18 to
6.8% in 3QFY18. On a positive side, manufacturing
growth showed a reversal rising by 8.1% in 3QFY18
as compared to -1.8% in 1QFY18, while utilities
remained steady at 6.1% growth in 3QFY18.

IIP and PMI

The recent data on overall industrial production (IIP)
showed signs of recovery reflecting a possible
strengthening of domestic demand and a further
build-up in global trade activity. Manufacturing sector
rose 9.3% on a 3mma (3 month moving average)
basis in Jan’18 compared to 7% rise as of Dec’17.
The turnaround in production levels is possibly a
reflection of turning consumption demand as also
suggested by an upswing in vehicle sales, cement
and diesel

07
India Economic Outlook

production. Significant gains in capital goods production is an Demand side analysis

encouraging sign while positive prints on consumer durables is
likely to boost economic growth.
The overall purchasing manager’s index (PMI) number’s also
showed an expansion in business conditions driven largely by
manufacturing PMI even as services PMI showed relative
weakness. The upturn in manufacturing PMI likely came on the
back of increasing output and new orders while the services side
contracted for the first time since November on account of rising
price pressures. Given the overall optimism in consumption
behaviour and trade activity, PMI numbers are expected to gain
strength in the period ahead.
A detailed look at the expenditure side suggests that the demand
behaviour has seen some improvement. However there remains
some discrepancy in private consumption and consumer durables
data. While private consumption grew at an average of 6.3% in the
first three quarters of 2017-186, consumer durables have contracted
through most part of the year. Importantly, it has largely been the
increases in private consumption and government spending that
has stimulated growth. However, the recently released Q3 data
which showed an unexpected jump in investment has revived
hopes that private investment sentiment may also turn positive.

GDP Quarterly growth rates (y-o-y, %)

Private Consumption Expenditure
Government Consumption Expenditure
35 Gross Fixed Capital Formation

30
25
20
15
10

5
0
Ma

Sep
Jun-15

Se

De

16
16

Ju
15

15

-16
n-
p-

c-

r-

-5

Dec-17
-10
Sep-17
Jun-1 7

Source: CEIC, Deloitte

Mar -17
Dec-16

6. CEIC Data and Deloitte Analysis

8
 India Economic Outlook

Recent Policy Measures to Boost Growth

a. Goods and Services Tax

• Launched in July 2017 with the aim to consolidate all other indirect tax laws
(save a few) and to also bring a harmonized tax structure and uniform
compliance practices both by regulators and businesses.
• Food items have been placed in zero or the minimum slab while luxury items get
taxed more. The government ruled out having a single rate for all commodities
under the Goods and Services Tax (GST)
• Many items which were earlier in the 28% bracket were brought into the 18%
bracket and this process of rationalization would continue.
• The committee shall recommend changes to be made in the process of filing of returns in GST, including the
threshold, if any, for quarterly filing.

b. Insolvency and Bankruptcy Code

• Launched in December 2016, it is a one-stop solution for resolving insolvencies which at present is a long process and
does not offer an economically viable arrangement.
• The code will be able to protect the interests of small investors and make the process of doing business simpler.
• Statistics show that the recovery is only 20% in India and in global ranking, the country is ranked in the 136th
position with respect to the time taken for resolving disputes.
• As per RBI, the total outstanding amount for top 50 stressed borrowers, funded by scheduled commercial banks, stood at
INR 3.7 trillion as on 30 Sep’17.

c. Jan Dhan Yojana and Aadhaar

• As on Dec 6, 2017, a total of 307 million accounts have been opened under PMJDY, including 180 million accounts
opened in rural/semi-urban areas.
• During the period between 8.11.2016 to 30.12.2016. INR 421.8 billion had been deposited in 3,74,14,844 PMJDY
accounts.
• A World Bank paper has noted a 10% gender gap in opening accounts under the country’s flagship financial
inclusion programme — Jan Dhan Yojana — with 73% men applying for accounts against 63% women.

d. Ayushman Bharat
• The government announced two major initiatives in health sector during the Union Budget 2018-19. The program is
aimed at addressing health holistically, in primary, secondary and tertiary care systems, covering both prevention and
health promotion.
• Health and Wellness Centre: The National Health Policy envisions Health and Wellness Centres as the foundation
of India’s health system. Under this initiative, about 1.5 lakh centres will be created to bring health care system closer
to the poor. For this purpose, the Budget has allocated INR 12 billion and the centers will provide health care,
including for non-communicable diseases and maternal and child health services.
• National Health Protection Scheme: This scheme is aimed at providing health cover up to INR 0.5 million per
family per year for secondary and tertiary care hospitalization and will cover over 100 million poor and vulnerable
families (approximately 500 million beneficiaries).

09
India Economic Outlook

Fiscal Consolidation: The story behind the math 7

India’s fiscal deficit has steadily declined over the years. However, the path to reach the target of 3% has been extended. If we analyse
the revenue trends, then, it can be seen that the gross tax to GDP ratio is likely to have risen by 0.2% to 11.6% in FY17-18 and tax
revenues are expected to grow by 16.6% in FY19 as compared to 15.3% in FY18.

Fiscal Deficit and Revenue Deficit (% of GDP) Tax and Non - Tax Revenue (y-o-y, %)

5.0 35 100
Fiscal Deficit (% of GDP) Tax Revenue
4.5 Revenue Deficit (% of GDP) 30 Non-Tax 80
Revenue
4.0 25 60

3.5 20 40
15 20
3.0
10 0
2.5
5 -20
2.0
0 -40
1.5
17(Act

18[RE

19[BE

20[P]

-5 -60
2019
2016-

2018-
2017-
uals)
2015-16

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
-
2013-

2014-

]
14

15

Source: CEIC, Deloitte Source: CEIC, Deloitte

Between Apr-Dec 2017, close to 80% of
the total receipts of the government were
generated from tax revenues. The total
tax income of INR 9 trillion in the first 9
months of FY17-18 represented
a growth of close to 25%8. Here, direct tax
revenue grew by 19.4% in the first 9 months
compared to a rise of 13.8% in FY16-17,
while indirect tax revenues grew only by
18.6%, against a sharper 24.8% rise in
FY16-17. The upswing in direct tax
revenue, if sustained, could signal a rising
tax base of the economy.
However, about 13% of the total receipts of
the government were generated from non-
tax revenues in the first 9 months of the
current fiscal: Non-tax revenues recorded a
decline of 12% between Apr-Dec 2017-18
over the last year as compared to a growth
of 9% in FY16-17 with total collections of
only INR 1.1 trillion. The government has
budgeted for INR 4.4 trillion in FY18
factoring in an average monthly inflow of
INR 400 billion.
Despite the healthy rise in tax revenues, the
sharp deceleration in non-tax revenue
pulled the overall strength down. The non-
tax revenues essentially constitute
spectrum auction proceeds, dividends and
profits of state-owned enterprises and the
Reserve Bank of India. Part of the shortfall
in revenues was met via disinvestments
and looking at the success of disinvestment
proceeds of the previous fiscal, the
government hopes to breach the target set
for FY17-18 by collecting INR 1 trillion and
further expects to raise INR
800 billion in FY18-199, including gains
from privatization of Air India Ltd. For
FY19, the government expects GST
inflows to improve substantially and have
factored in INR 620 billion on a monthly
basis.
Fiscal Math for FY 2018-19
For the coming fiscal year, the government
is assuming a further enhancement
in gross tax to GDP ratio to ~12.1% for
FY18-19, essentially on the back on a
meaningful rise in indirect tax collections.
That said, the Budget math also accounts
for a higher direct tax buoyancy as
the government expects improved tax
compliance in the coming year.
On the expenditure side, the government
has budgeted a 10% growth for FY19 as
compared to a growth of 12.3%10 in FY18.
Prima facie, this number looks credible
though the fine print does suggest
that there could be some overruns. Given
that we are in a pre-election year, slippages
in rural and urban development expenditure
would not be a complete surprise while
limiting oil subsidies at 2% growth might
also be challenging.
Based on these estimates, the government
has estimated that the fiscal deficit in FY
2017-18 will be 3.5% of GDP. Furthermore,
the glide path for fiscal deficits has also
been changed as now the government
intends to hit 3.3%11 of GDP next year and
reach the target of 3% by FY21.

7. http://www.indiabudget.gov.in/ub2018-19/frbm/frbm2.pdf
8. CEIC Data and Deloitte Analysis
9. http://www.business-standard.com/article/economy-policy/niti-aayog-preparing-new-list-of-sick-psus-for-disinvestment-amitabh-kant-
118022200081_1.html
10. http://www.indiabudget.gov.in/ub2018-19/rec/annex1.pdf
11. http://www.indiabudget.gov.in/ub2018-19/frbm/frbm2.pdf

10
 India Economic Outlook

Bond Market Risks Government Securities Yield (10-year)

Fiscal slippage will most likely bring in 8.5
financial market volatility, especially in
terms of cost of borrowings which have
already hardened over the last few 8.0
months.

7.5
Post the Budget, the benchmark 10-year
yield hit a 22-month high to close at
7.6% and is currently trending at 7.68% as 7.0
of the last close on 15 March, 201812,
having gained close to 6% since the
Budget. Since the RBI announcement to 6.5
inject INR 1 trillion into the system saw
bond yield dipping nearly 15 basis points
on 12 March after hitting a high of 7.78%. 6.0

Jun -16
Feb-18

Dec-17

Aug-17

Dec-16

Aug-16

Dec-15

Aug-15
Feb-17

Feb-16

Feb-15
Jun-17

Jun-15
Oct-17

Oct-16

Oct-15
Apr-17

Apr-16

However, we believe that the domestic
bond market have risks to the upside and
may get affected due to expectations of
rising oil, re-capitalisation, and likely
shortfall in GST
collections.
The rise in bond yields are also signalling
that interest rates have already hit their
trough and are likely to be on an upward
trajectory in the upcoming fiscal year.
This rise is in consonance with global rates
as most important global central banks
have signalled an end to the ultra-loose
monetary policy. The US Fed is on course
to increase its benchmark rates further
while the European Central Bank
has also hinted at a winding up of its
stimulus program faster than expected.
These global factors combined with
possibility of higher inflation and growth is
likely to result in the 10-year yield moving
further north over the course of the year.
Apr-15
Source: CEIC, Deloitte
part of 2017 as crude oil prices have reading for Feb’2018 saw larger than
started moving up and favourable base expected easing that came on the back of a
effects have waned. During this period, slowdown in the more volatile food price
some increase in food prices along with inflation. Also, only marginal uptick in core
one-time modifications on account of pay inflation was recorded possibly on the back
revisions in the public sector and housing of lower base effect and a likely pass-
rent allowance being revised upwards through of input costs. The main challenges
have also led to rising inflation. this year are likely to come due to rising
crude oil prices on account of global oil
However, it seems that inflation output cuts. Further
pressures are weakening. The latest
Components of Consumer Price Index (y-o-y, %)
8 CPI: Overall
7 CPI: Food & Beverages
Core CPI
6
5.1
5
O

D
A

F
u

1
7

u
g

1
7

e
p

1
7

1
7

1
7

1
7

a
n

1
8

e
b

1
8
J

J
-

-
t
l

3.9
4
M

M
D

A
F
e

1
6

a
n

1
7

e
b

1
7

1
7

1
7

1
7

u
n

1
7
c

J
-

r
-

r
-

Inflation: largely under control

though risks have emerged 3
One of the major positives over the past
2
few years has been the declining inflation
levels. Consumer price inflation has in fact, 1
fallen to multi year lows during the last
fiscal. This has been possible on account 0
of falling or stable global commodity prices -1 Deloitte Oct-16
18[E]FY1
8-19[E]
FY17-

Source: CEIC,Sep-16 Nov-16

and better management of supply
1
Au - 6

-2
shortages in the agrarian economy. That
g

said, inflation pressures did reverse during

the latter

12. CEIC, Bloomberg and Deloitte

11
India Economic Outlook

to this, the Budget has announced 50% higher MSP

than cost even though there exists some ambiguity
on how costs will be calculated. A higher MSP
generally tends to provide a floor for prices thereby
pushing inflation on food prices. It will be important
to analyse what the impact has been of a hike in
MSP over the last year. As such, we are likely to
witness a year of higher inflation and
macroeconomic management due to these
challenges.

CPI inflation for FY18-19 is likely to come in at an

average of around 3.9%13 for the full fiscal year,
slightly below the RBI’s long-term target of 4%.
We expect inflation to remain high in the range of 5-
6% during the first six months of the current
calendar year after which we are likely to see a
decline as relatively higher base is expected to
cushion against higher inflationary readings.

Monetary Policy and Outlook

The RBI had steadily cut the repo rate from
7.25% in Aug’15 to 6% in Aug’17. Since then the
RBI has held the policy rate steady with more
emphasis on reviving domestic growth. In the
current economic scenario, with world economy
having built further momentum and with the
anticipation of a further escalation in global
commodity prices, the space for monetary
manoeuvring has become limited. Since its Aug’17 a fall in revenue collections, all of 5.6% in the 1HFY19 and then ease
policy meet, the RBI has maintained its stance citing which are likely to have implications to 4.5-4.6% in the 2HFY1914, and
concerns on inflation front as well as spill-over risks for inflation. with the yearly estimate set at
from global policy changes. Importantly, household 4.5% it can be expected that any
expectations on inflation has seen a rise and In its last bi-monthly monetary policy for monetary action by the RBI will be data
separately concerns on fiscal slippage have the fiscal year 2018 in Feb’18, the dependent. In our view there remains
increased, especially on account of implementation Monetary Policy Committee (MPC) in some upside risks to inflation which
Feb 2018 said inflation has been may become visible in the second half
of farm loan waivers, partial roll back of excise duty
of FY18-19 on account of oil price hike,
for petroleum products, and stipulated to remain around 5.1-
and possible
Repo Rate and Base Rate (%) rise in input costs. The important
10.5 question for FY 2018-19 is whether
10.0 and when the RBI will announce an
9.5
increase in the repo rate.
9.0
8.5
Twin Balance Sheet Problem
8.0
and NPAs
7.5
The credit growth has remained
7.0
6.5 subdued due to the twin balance
6.0 sheet problem that India has been
5.5 facing. The issue here is that balance
sheets of Indian companies and
Feb -17
Feb-18
Dec-17

Aug-17

Dec-16

Aug-16

Dec-15

Aug-15

Dec-14

Aug-14
Feb-16

Feb-15
Jun-17

Jun-16

Jun-15

Jun-14
Oct-17

Oct-16

Oct-15

Oct-14
Apr-17

Apr-16

Apr-15

banks both have been under stress.

While Indian companies remain over-
Source: CEIC, Deloitte leveraged,
13. CEIC Data and Deloitte Analysis
14. https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=43078

12
 India Economic Outlook

the banks are reeling under high non-
performing assets. The banking sector is
expected to see a further rise in its
stressed assets base for FY17-18 to about
INR 9.5 trillion from about INR
8 trillion in FY16-1715. As per the stress
tests (Financial Stability Report, RBI
2017)16, in the baseline scenario, Gross
NPAs (non- performing assets) of the
banking sector may rise from 10.2% of
gross advances in September 2017
to 10.8% in March 2018 and further to
11.1% by September 201817.
The new Insolvency and Bankruptcy code
(IBC) and the bank recapitalisation plan are
the two-pronged policy responses that have
been formulated to tackle this issue. The
twin balance sheet problem has been long-
standing and while the new Insolvency and
Bankruptcy code (IBC) will possibly help,
we believe
it requires complementary reform
measures to alleviate unviable banks and
allow greater private sector participation.
Looking ahead, the falling share of private
investments necessitates pro-active
measures to stimulate investment
sentiment and we believe that the expected
push toward infrastructure development
along with recapitalisation of public sector
banks will likely have a positive impact on
investment demand.

Non-Performing Assets (INR Billion, FY)

Total Non-Performing Loans
NPA: Public Sector

10000 9500
9000
7902.7
8000
7000
6116.1
6000
5000
4000
3229.2
3000 2630.2
1932
2000 1420
1000 847 979
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
[E]
Source: CEIC, Deloitte FY2018 value is estimated

Trade and Investment

Exports and Imports (3mma y-o-y, %)

50
Imports (%)
Exports (%)
35

20

-10

-25
Jul-17
Jul-16
Jan-16

May-

May-

Nov-
Nov-

Aug-
Aug-

Mar-
Mar-

Sep-

Dec-
Feb-
Dec-
Feb-

Sep-
Apr-

Oct-

Oct-
Jun-
Jun-

Jan-

Apr-

Jan-
17
16

16

17
16

17
16

16

17
16

17

17
16

17

17
16

16

17

17
16

17

18

Source: CEIC, Deloitte

15. http://www.assocham.org/newsdetail.php?id=6696
16. https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSR201730210986ADDA44E2A946A3F6C4408581.PDF
17. CEIC Data and Deloitte Analysis

13
India Economic Outlook

Looking at the real data, the external sector has remained rather muted
despite the global economy performing well. Indian exports grew only by
11.2% between Apr-Jan 2017-1818. If we look at the details of the exports,
highest growth has been seen in sectors such as gems and jewellery, mineral
fuels, machinery, pharmaceuticals, organic chemicals, electrical machinery
textiles among others.

Export by Principal Commodities, FY2016-17

Engineering Goods

Petroleum Products

Gems & Jewellery

24%
28%
Ready Made Garments of All Textiles

Drugs & Pharmaceuticals

11%
4% Organic & Inorganic Chemicals
5%
Cotton Yarn & Handloom Products
6% 16%
6% Others

Exports: USD 275 bn

Source: CEIC, Deloitte

Further, economies including US, United Arab Emirates, ASEAN, Hong Kong,
and China continued to be our largest export destination, followed by UK,
Germany and Sri Lanka.

Export by Country, FY2016-17

United States of America

United Arab Emirates

15% ASEAN
Hongkong
China
40% 11% Saudi Arabia
United Kingdom
Germany
11%
Sri Lanka
Bangladesh
5% Netherlands
4%
2% 3% Others

3% 1% 3% 2%

Exports: USD 275 bn

Source: CEIC, Deloitte

18. CEIC Data and Deloitte Analysis

19. CEIC Data and Deloitte Analysis

14
 India Economic Outlook

In contrast, total imports showed considerable strength over the better part of
the year, growing at a double digit pace – maintaining an average of 23%
from Apr-Dec 2017 as compared to an increase of merely 1.9% in FY16-1719.
While, the uptick in imports in part suggests resilience of domestic demand
as they largely started seeing an upswing around the time of demonetization.

Importantly, non-oil, non-gold (NONG) imports, proxy for domestic demand,

have seen a healthy growth over last year. Between Apr-Dec 2017, NONG
imports grew an average of 20% as compared to a 1% rise over the previous
full fiscal year. Of the major categories, imports witnessed double digit growth
across ores and minerals, electronics, machinery, base metals, chemical and
products, paper and products, and plastic and rubber.

Import by Principal Commodities, FY16-17

Petroleum, Crude & Products

Electronic Goods
25% Gold
31%
Machinery, Electrical & Non-Electrical

Miscellaneous

4% Pearl, Precious, Semi Precious Stones

4% Organic and Inorganic Chemicals

4% 8% Coal, Coke & Briquettes

5% Iron & Steel

8%
5%
6% Others

Exports: USD 380 bn

Source: CEIC, Deloitte

Non-oil non gold imports (y-o-y, %)

45

35

25
M

M
N

N
S

S
e
p

1
6

1
6

a
n

1
7

1
7

1
7

1
7

e
p

1
7

1
7

a
n

1
8
v

J
-

r
-

-
l

15
M

N
S
a
n

1
5

1
5

1
5

1
5

e
p

1
5

1
5
J

v
-

r
-

-
l

-5
M

M
a
n

1
6

1
6

1
6

1
6
J

J
-

r
-

-
l

-15

-25

Source: CEIC, Deloitte

19. CEIC Data and Deloitte Analysis

15
India Economic Outlook

Growth in oil imports has marked an upswing in the last Trade Deficit (USD bn)
six months to Dec’17. In contrast, gold imports have -2
remained muted.

-4
Overall trade deficit has risen close to $117 billion
between Apr-Dec 2017 as compared to $78 billion in
the same period last year20. Despite a continuous rise in -6
trade deficit, it is expected to remain under control over
the coming period as exports mark a rise on the back of -8
upswing in external demand and diminishing impact of
disruptions.
-10
At the same time, the Current Account Deficit (CAD) is
largely expected to remain under control and print in -12
around 2% for the current year. India remains
cushioned by impressive investment inflows which puts
-14
India in more than a comfortable state to finance the
deficit. That said, India maintains a surplus in trade of
services that has -16
in part helped in containing CAD. Stable long term
Jan-18

May-17

May-16
Dec-17
Nov-17

Sep-17
Aug-17

Dec-16
Nov-16

Sep-16
Aug-16
Mar-17
Feb-17

Mar-16
Feb-16
Jun-17

Jan-17

Jun-16

Jan-16
Oct-17

Oct-16
Apr-17

Apr-16
Jul-17

Jul-16
flows coupled with high market inflows have meant a
further rise in forex reserves which have increased to
$400 billion in the 1HFY2017-18 as compared to Source: CEIC, Deloitte
$370 billion FY2016-1721.

CAD and FOREX (%, Actuals)

FOREX Reserves (USD bn)
Current Account Deficit (% of GDP, RHS)

400 0

350 -1

300 -2

250 -3

200 -4

150 -5

100 -6

50 -7

-8
0
Sep-12

Mar-15
Jun-12

Dec-13

Jun-17
Jun-16
Mar-

Sep-

Sep-
Mar-

Mar-
Jun-

Jun-
Dec-
Sep-11
Dec-

Jun-

Mar-
Dec-

Dec-
Sep-

Sep-

Dec-
Mar-
12

15

16
13

14
13

14

15
12
11

17
14

15
13

14

16
16

Sep
-17

Source: CEIC, Deloitte

20. CEIC Data and Deloitte Analysis

21. CEIC Data and Deloitte Analysis

16
 India Economic Outlook

Foreign Direct Investment: Inflow (Quarterly, USD bn)

16

14

12

10

Q
Q
Q

1
1
Q
1

1
Q1

Q3
Q

Q
3

3
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017 -18

Source: CEIC, Deloitte

What’s in store for the rupee?

The Indian rupee (INR) has shown tremendous strength over the better part of 2017, especially looking at the past trend when it had
seen a fall for almost six years. At the year-end, the domestic currency broke above the 64 handle coming in at 64.64 to the US dollar as
of 19 Feb 201722. The remarkable rise in INR could have been prompted by strong foreign flows, proactive policy initiatives, and relative
weakness in US dollar.

Exchange Rate Movement (INR/USD)

69

68

67

66

65

64

63
Dec-15

Jul -17
Jul-16
May-

May-
Feb-

Nov-
Aug-

Sep-

Dec-
Nov-

Mar-

Feb-
Dec-
Mar-

Sep-

Aug-
Feb-

Apr-

Mar-
Oct-
Apr-

Jan-

Jun-
Jan-

Oct-
Jun-

Jan-
16
16

17
16
16

16

17

18
17
17

17
17
16

17
17
16

17
16

17
16

17
16

16

18

18

*March value is as of 13 Mar'18

Source: CEIC, Deloitte

22. CEIC Data and Deloitte Analysis

17
India Economic Outlook

However a rising INR is not always Real Effective Exchange Rate (Export based weight)
welcome for all sectors. As long as the
real value of INR is higher than the real 125
value of currencies of other competing
nations, Indian exports will be outpriced in
the global markets. 120
In 2017, apart from appreciating against
the dollar, the rupee has also appreciated
against the currencies of Indonesia, Brazil,
and Turkey, while depreciating against 115
nations such as Thailand, and Malaysia. It
is important to acknowledge that rising real
exchange rate (REER) remains above 110
100, which suggests that the Indian

Feb -18
currency remains overvalued at current

Dec-17
levels. We believe that while the rupee will

Oct-1 7
see some stability in the near term, it is

Aug-17
likely to depreciate orderly over the year.

Jun-1 7
Apr-1 7
Feb -17
Dec-16
Oct-1 6
Aug-16
Jun-1 6
Apr-1 6
Feb -16
Dec-15
Oct-1 5
Aug-15

Value above 100 represents overvaluation

Source: CEIC, Deloitte

Conclusion
While the last year saw a number of changes to the system, the impact of these have largely waned as new equilibria has started to set in.
The Indian economy has once again regained the tag of the “fastest growing economy”. How sustainable this momentum will be and by
when our economy can cross the 8% Rubicon, will depend on how effectively the various policies, especially with respect to structural and
infrastructure related reforms are implemented.
18
 India Economic Outlook

Disclaimer
a. Sources where not mentioned have been taken from CEIC and Deloitte.
b. The data taken into consideration for the analysis ends in February 2018.

Acknowledgements
Anis Chakravarty
Lead Economist and Partner

Richa Gupta
Senior Economist and Senior Director

Umang Aggarwal
Economist

19
India Economic Outlook

20
India Economic Outlook

21
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