By Charudutt Sehgal


The economic progress of a nation and development of its banking sector is invariably interrelated. The banking sector is an indispensable financial service sector supporting development plans through channelizing funds for productive purpose, intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of the government. Banks serve social objectives through priority sector lending, mass branch networks and employment generation. Maintaining asset quality and profitability are critical for banks survival and growth. In the process of achieving such objectives, a major roadblock to banking sector is prevalence of Non-Performing Assets (NPA). In India, the problem of bad debts was not taken seriously until it was mandated by the Narasimham and Verma committee. The committee mandated the curbing of the particular issue because NPA direct towards credit risk that bank faces and its efficiency in allocating resources.

The aim of this research paper is to study the current trend of NPAs in Indian scheduled banks (up to 2013-14 only). The paper further examines the critical reasons behind the rise of this issue, its impact on Indian banking sector and Indian economy. In order to understand the criticality of the problem an effort has been made to study what impact NPAs have on ease of doing business rankings. Furthermore, the paper concludes with some of the important measures which if implemented then can improve the current scenario of NPAs in SCBs.

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Finacabulary #10- Animal Spirits

Meaning: Describes human emotion that drives consumer confidence.

A term used by John Maynard Keynes in his 1936 publication (“The General Theory of Employment, Interest and Money”), animal spirits emphasizes the importance of confidence and the ‘gut instincts’ of businessmen on their future business prospects. It also refers to the risk involved in taking decisions which invariably have an element of risk attached to it. The term itself is drawn from Latin – spiritus animales, which may be interpreted as the spirit that drives human thought, feeling and action.


By Vinay Narasimhan

Edited by Balakumar M

The global economy can interestingly be compared to a human body and countries to blood cells. When blood cells in one part of the body get affected, the infection rampantly spreads to other parts making the entire body frail. An antidote may not be strong enough to help the blood cells recover. A human body makes its own antibodies to fight such infections. It allows the weaker blood cells to die and forms new blood cells to fight the infection effectively.

In this paper, we would try to establish how this phenomenon applies to the global economy where, often the best possible way to revive an economy is to allow it to correct itself with least government intervention.

A downturn in the economies across the globe stems from a slowdown in GDP growth rate. Often inflation (or deflation) and liquidity shortage accompany the downturn as symptoms for bigger events. This leads to financial instability within the country which, in turn spreads to other economies due to globalization. This results in a financial crisis across the globe.

Since a banking system acts as the backbone to an economy, its stability greatly depends on the adopted banking practices. One of the many disguised threats to an economy is the use of fractional reserve banking system. In this system, when a person deposits a particular amount of money in the bank, it keeps a small portion as reserves and lends the rest. The money lent gets deposited in another bank and the cycle continues.

This cycle shows that only a small fraction of money is in the physical form as currency and the remaining is in the form of debts. Such low levels of liquidity become a critical factor for perpetual growth or collapse of an economy.

Some of the major events of economic downturn across the world for the past 25 years are as follows:

The Energy Crisis (2003 onwards)

In 2003, the oil prices had suddenly gone up from a historic price level of $25 to $30. By 2008, it touched $147, an increase of 390% in 5 years. This was majorly because of unrest in the middle-east, fall in the US dollar, the Israel- Lebanon conflict and hurricane Katrina. This shows how oil prices were impacted by events across various countries in the 2008 recession.

The Housing Bubble (2008)

The collapse of Lehman Brothers, a giant global financial services firm in September 2008 almost brought down the financial system of the entire world. The credit crunch that followed the fall of many such banks turned the already nasty downturn into the worst recession seen in the last 80 years. The crisis had multiple causes. The financiers, central bankers and regulators were to be blamed.

Some of the events and their impacts were:

  • The emergence of Government Sponsored Enterprise – Fannie Mae and Freddie Mac and the Community Reinvestment Act pressurized banks to provide risky loans.
  • Increased savings in Asia led to a fall in global interest rates.
  • European banks borrowed American money and invested in dodgy securities.
  • Due to low inflation and stable economy till mid 2000s risk appetite of American citizens had increased.
  • Huge loans were lent without proper credit checks.

Several of these mortgages were passed on to financial engineers who converted them into low-risk securities. Investors across the globe were attracted to these securities as they gave good returns. In 2008, the borrowers started to default on their payments which became a big threat to investors. This led to the burst of the housing bubble. This economic event had a huge impact on the global economy especially the emerging nations and the Euro-Zone, which are known to be highly correlated to the US economy.

The European Sovereign Debt Crisis (2009)

This is also referred to as the Eurozone crisis. In 1993, the European Union originated from The Maastricht treaty that brought together 27 European countries to reduce the trade barriers between them and boost economic growth across EU. European Central Bank was then formed a regulatory authority for all the banks in the Euro Zone. Banks from any country within EU could lend to each other. This led to an increase in fiscal spending. There was a rise in employment opportunities in this zone which in turn increased the cost of living and borrowings. This had a cyclic effect.


Since the US and the Euro Zone are positively correlated to each other, crisis in the US had a huge impact on European countries. Greece, Ireland, Portugal, Iceland and Spain’s debt increased rapidly leading to huge fiscal deficits. There came a situation where banks from stable nations like Germany started implementing stringent policies. This led to a crisis across these nations which were interconnected to each other. As these countries had huge borrowings from each other, all the countries that lent the money were also affected by the crisis.

Fiscal prudence and spending cuts were imposed in these countries followingthe suit that Germany had started. There was a huge unexpected multiplier effect because of the fiscal cuts which led to fall in employment and prices across EU.



The Arab Springs (2010)

The European financial crisis was contagious to economies beyond its geographic dimensions. The dissatisfaction amongst the people due to high inflation, unemployment and poor living conditions led to a revolt against the ruthless autocrats of the Arabian countries.

Europe is the major trade partner of the Arab countries. About 60-80% of the oil in this region is exported to Europe. Euro crisis also affected the tourism in the Arab region leading to a drop in money transfers. Flow of money through the banking sector also shrank drastically due to fall of the European Banking system.

The result of the Arab Spring had an impact on various countries due to huge rise in the oil prices from $91.58/barrel in December 2010 to $126/barrel in April 2011. This led to an increase in inflation across several developing and developed countries.

Russian Crisis (2014)

Crude oil exports constituted a major part of Russia’s economy. Although Russia benefitted from the surge in oil prices, it had to face a negative effect in 2014 when the economy crashed due to two major reasons:

  • Fall in the price of oil due to increase in production by the US
  • Sanctions against Russia due to its military intervention in Ukraine
    This shows a negative correlation between US and the Russian economy.Stability in one region leads to a slowdown in the other.

Chinese Economic Crisis (Present)

The global debt is expected to cross $200 trillion. Apart from countries like US, Japan and the Euro Zone nations, China has a major share in the global debt owing to its expansionary monetary policy. The total debt has increased to around 280% of its GDP. Real estate which contributed largely to the GDP has also slowed down, piling up the unsold properties to a record high. The bonds of Chinese corporates are nosediving and several huge real estate companies sought bailouts from the Central Bank. The Chinese Central Bank responded by cutting the Reserve Requirement Ratio and relaxing the monetary policy. This might have a catastrophic effect on the global economy as it involves huge investments and lending from banks across the world. There is a great possibility of China becoming the epicenter for the second global economic crisis.

From the above analysis, we can infer that a period of rapid economic growth is succeeded by a slowdown in the economy. This can be termed as a cyclical slowdown. An intervention with an unavoidable delay in implementation could aggravate the situation. In such a scenario, Milton Friedman’s free market economy with least intervention unarguably holds true. Hence, allowing the economies to correct themselves with least government intervention would be the best possible solution.


FT.COM – World business, finance, and political news from the Financial Times – FT.com
In-text: (Ft.com)
Bibliography: Ft.com,. ‘World Business, Finance, And Political News From The Financial Times – FT.Com’. N.p., 2012. Web. 7 May 2015.

THE ECONOMIST – The Economist – World News, Politics, Economics, Business & Finance
In-text: (The Economist)
Bibliography: The Economist,. ‘The Economist – World News, Politics, Economics, Business & Finance’. N.p., 2014. Web.

In-text: (Bofinger, Reischle and Schachter)
Bibliography: Bofinger, Peter, Julian Reischle, and Andrea Schachter. Monetary Policy. Oxford: Oxford University Press, 2001. Print.

JAIN, B. AND PROFILE, V. – BJ’s nocabbages
In-text: (Jain and profile)
Bibliography: Jain, Bharat, and View profile. ‘BJ’s Nocabbages’. Bjnocabbages.com. N.p., 2013.

In-text: (Jonathanjarvis.com)
Bibliography: Jonathanjarvis.com,. ‘Jonathan Jarvis’. Web. 20 Nov. 2014.


By Shulin V K Satoskar

Edited by Madhu Veeraraghavan


China’s devaluation of Yuan, last week, represented the largest depreciation of the currency for 20 years and sent tremors down the Dalal Street. The “Kiss of the Dragon” was felt across already subdued economic conditions throughout the world. Notably, Nobel Laureate and renowned economist Paul Krugman described the decision as “the first bite of the cherry” envisaging that more could follow. The World’s largest economy could be weaker than the 7% a year growth that official figures suggest.

In my attempt to explain the slowdown in Chinese economy and a great opportunity for India to bank upon, I have used the concept of business cycles and its impact on economies.

Business Cycle

A business cycle is defined by the fluctuations in an economic activity over a period and covers expansion/recession in any economy. An expansion phase is marked by rising indicators like income, employment, industrial output.

Cyclical fluctuations in economic activity are features of most economies. One of the reasons why nations fail to achieve a sustainable economic growth rate is because the policy makers underestimate economic cycles. Hence, an improved understanding of the economic cycles and policies interaction is imperative in formulating forward looking monetary policy.

Economists are often puzzled by the Growth-Inflation paradox. Most agree

that sustained growth rate cannot be achieved above a threshold rate of inflation; there are no models that accurately estimate on what constitutes the “Threshold”. Figure 1 captures an economic cycle in Indian economy from 2005-10. Inflation rate (depicted by the Green line) and Business Cycle (depicted by blue) further help identify the counter-cyclical nature of Growth-Inflation tradeoff with inflation rate almost mirroring the business cycle at identical turning points. Such an economic cycle (typically over a period of 6 years) is known as a Juglar Cycle or J-Cycle. Indian economy currently finds itself at its peak as indicated by the rising trend of the Juglar cycle in 2015, with lower inflation levels, tailor made for a super normal growth stage. However, Juglar peaks are often short lived (1-2 year, see period 2005-07 and 2009-10) and troughs are relatively lengthier (2-3 years, 2010-13).


There is also a pattern of symmetry around which the cyclical trend oscillates over a period. This is termed as Kondratieff cycle or K-Cycle and usually extends over a period of 42 years. Hence, a K-Cycle typically has 7 J-Cycles. Figure 2 captures a K- cycle in the Indian economy and the breakout started around 1974. A rising trend is indicated by the green trendline below. Such a trend is typical of a robust economy.


Chinese economy, on the contrary, has experienced a slowdown in consumption in the recent years. The J-cycle from 2010 to 2015 accurately captures this falling trend in Figure 3. Chinese economic cycle has not picked up significantly, in spite of recording a lower inflation rate. Recent RMB devaluation and interest rate cuts further confirm the ineffectiveness of policies introduced during the ‘troughs’. Also, the ‘trough’ looks abnormally extended with little signs of recovery.


Summary of Findings

From the CRISIL research reports and World Bank data, it can be inferred that:

• Domestic investment in China has shown signs of saturation and there is little room for stimulus (Investment accounted for 47.2% of GDP in 2010 and 46% in 2014). India has huge room for public investment and can absorb trillions of dollars in infrastructure alone.

• A very popular argument among economists is that China has an ageing population which is expected to drive the labor costs up further by 2020.

• Going by IMF figures of 2013, consumption expenditure 70.4% of GDP in India compared to that of 49.6% in China.

• Chinese debts have risen to alarming levels (101% from 2007 to 2014). India on the contrary is relatively safe at 5% increase.

• With a subdued demand across the world, China can rely on export driven growth strategy at its own peril. India’s consumption driven strategy leaves a good headroom from potential upside.

• Pressures of the property bubble are already felt in China as real estate prices are on a decline.


The Road Ahead

India is now one of the strongest growing economies and remains better positioned compared to its peers. Our country with a stable political environment recorded a sharp decline in inflation and managed to reduce Current Account Deficit (CAD) significantly. prime minister’s foreign visits have managed to win the foreign investor’s confidence yet again indicated by rising FII/FDI inflows. A combination of tactical measures like  the mobilization of NRI deposits, RBI’s success in building forex reserves, restriction on gold imports and slowdown in imports augur well for maintaining sustained growth rate. Currency devaluation war, how- ever, is one major external shock that remains a cause for concern. However, global sentiment still remains bullish on Indian economy on account of the following factors:

• RBI Governor, Mr. Raghuram Rajan has succeeded in building a strong monetary policy discipline that focusses on inflation targeting which in turn strength- ens the rupee.

• With the Land Acquisition Bill, FDIs and GST reforms round the corner, Indian growth story is expected to continue.

• India Inc’s earnings are expected to be 7% this year. Estimated reduction in corporate taxes and GST replacing state taxes will push the earnings upwards.

Major Challenges

• Currency devaluation war is one major external shock that remains a cause for concern

• Subdued global demand can hit India’s exports further impacting the economy

• Impending decision by the US Fed to raise interest rates has the potential to cause volatility in capital and forex markets

          Going by the business cycles and the empirical data on macroeconomic variables, Indian economy certainly is in a good shape compared to its northern neighbour. However, the onus lies on the government to bank on a great opportunity that the ‘peak’ of economic cycle has to offer.


  • CRISIL Research Reports on Indian Economy
  • Science of Monetary Policy: Some perspectives on Indian Economy by M J Manohar Rao
  •  www.worldbank.com

IMG_7666About the author:

The author was a Banking and Financial Service student of batch 2014-16. He is currently Management Trainee at CRISIL Research. His area of interest is economic research,  capital market, stock picking, and fund management. You can contact him at shulin.kamat@gmail.com.


By Priyanka Modi

Edited by Sachit Modi

Executive Summary

The purpose of this paper is to analyze the impact of the slowdown in the economic growth of China on India. I will analyze the repercussions of Chinese economic crisis on the global economy. India being well-integrated with the global economy cannot be alienated from the effects of the slowdown. I will discuss both the benefits and the negative implications for the Indian economy. In the midst of this crisis, there is also an opportunity for India. I will consider the steps that can be taken by the Indian government to reduce the degree of the negative impacts of the weakening Chinese economy and leverage the opportunities at hand.

Ever since the economic growth of China, India’s largest trading partner in goods started slowing down, concerns have been raised over its possible impact on the Indian economy. The steep fall in value of the Chinese currency, Yuan, in recent times has once again emboldened the naysayers. While it will be erroneous to argue that India will not be impacted by the economic churning happening in China, it will be equally irresponsible to suggest that India will be completely doomed if China falters. In value terms, China accounts for approximately one-tenth of India’s merchandise trade, and bulk of it comes from imports of goods to India. India’s trade deficit with China stood at $51.86 billion, with a bilateral trade of $71.22 billion in 2015. During this period, India’s exports to China came in at $9.68 billion while imports stood at $61.54 billion. With respect to 12 major product groups largely manufactured by MSMEs, imports from China grew at a higher rate than respective imports from all other countries combined during the period negative impact of a Chinese slowdown as trade flows slow down. At the same time, it should also explore the positive side and leverage the opportunities it has.

Implications of Chinese slowdown on the Global Economy

China used to have the fastest growing economy with growth rates averaging 10% over the past 30 years, according to the International Monetary Fund. They account for close to half of the global consumption of copper, aluminium and steel, and more than 10% of the crude oil. China has driven global growth, which has averaged a paltry 3% a year since 2008. So, the Chinese economy slowdown would impact different regions of the world in different ways depending on their exposure. In countries like Australia, Brazil, Canada and Indonesia, which are dependent on the commodity exports, the slowdown could have a negative impact on their GDP. However, the inevitable fall in the commodity prices could be beneficial for the countries that consume the commodities, such as the United States. Either way, the slowdown will require some adjustment on the part of the global economy. As per IMF, the country was the single largest contributor to the global economic growth, contributing 31% on average between 2010 and 2014. In this scenario, slower Chinese GDP growth would definitely have global repercussions. A fall in exports to China will impact countries such as South Korea, Japan, Brazil and Australia as exports to China are ~20-30% of total exports for these countries. India too won’t be spared as the overall global growth falters.

Positive Impact on India

Lower commodity prices: The first and an overwhelmingly positive impact of a slowdown in China’s commodities demand on India would be through lower commodity prices. India imported $139 billion worth crude and petroleum products in the FY 2015, and as a rough rule of thumb, every $1 drop in crude prices results in a $1 billion drop in the country’s oil import bill.

Attract foreign capital: Though India cannot do much about the currency, the rupee is expected to remain strong as oil prices tumble and markets remain flush with foreign money. While the impact of China is negative for exports, it may provide a good opportunity for Indian debt and equity markets. The Chinese devaluation has scared foreign investors who may flock to India to look for better returns. A depreciated currency shrinks the dollar value of investments at the time of repatriation. Given that other large emerging markets such as Brazil, Russia and South Africa are going through their own economic issues, India currently is the best-placed country among the top developing nations to attract these flocking investors.

Lower cost of infrastructure: China is the world’s largest copper consumer, accounting for 40% of the global consumption. The Chinese slowdown has resulted in the fall in prices of the hard commodities, especially copper and aluminum. These commodities constitute the largest portion of the infrastructure bills. Thus, the fall in prices could be beneficial for India, whose major focus at this time is building a strong infrastructure network for the country. This fall would help India to reduce the cost of constructing new infrastructure and would act as a supporting element to initiatives such as the Smart City Mission.

Control deficit and inflation: Oil prices were already tumbling down because of the global slowdown and the possible US-Iran deal. The Chinese economic slowdown further plummeted the prices. Low oil prices help India to control its deficit and keeps inflation under check.

Higher profits for Indian corporates: Over the past few years, due to the depressed domestic demand, many of the Indian corporates had been struggling with their pricing power and were unable to pass on the increased cost to the end consumer. Cheap global crude and commodity prices mean lower input costs, translating into higher profit margins for them. This will act as a major respite for them.

Negative Impact on India

India’s export growth: India’s exporters will lose out on currency competitiveness in the segments where it competes directly with China, particularly textiles, apparels, chemicals and project exports. If the Chinese demand slows down, its raw material requirement will go down, and India’s exports to that country may decrease to such an extent that it may not be able to take advantage of the Yuan devaluation to earn more dollars. The fact that India’s exports to China declined 19.5 percent to $11.9 billion in 2014-15 from $14.8 billion a year ago illustrates this. India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15. And China’s share of India’s total trade deficit is up from just under 20% in 2009-10 to 35% in 2014-15. Thus, there is a chance that India may lose out in the race.

Indian metal producers: China accounts for nearly half of the world’s steel production and as construction and investment slows down, the decline in demand for commodities will hurt the Indian metal producers. Steel companies and Aluminium manufacturers may start facing losses. Hindalco and Balco, for instance, are increasingly relying on costlier captive coal. Steel manufacturers like JSW Steel and Tata Steel were forced to lower their prices and face the fear of dumping from across the border. Also, companies like Tata Steel and SAIL, which have their own mines, will suffer the most as they will not be able to benefit from the lower iron ore and coal prices. Metal producers like JSW, who buy coal and iron ore from the open market, would be the least affected.

Tyre industry: As demand slows down in their home market, Chinese tyre makers might start exporting tyres at very competitive rates to the rest of the world. A Chinese tyre is around 30-40 per cent cheaper as compared to the domestic prices. Thus, the commercial vehicle tyre segment will be negatively impacted as most of the consumers are more concerned about the value rather than the brand.

Automobile industry: China had the potential of becoming the fastest growing market for the automobile exporters and manufacturers. As the demand in their market goes down, companies like JLR, who were investing in that market, will have to look for alternate options.

How should India react?

India’s GDP has expanded by 7.3 percent in the last quarter of 2015 whereas China’s GDP slipped to 6.8 percent in the same period. India will be the fastest-growing major economy in 2016-17 growing at 7.5%, ahead of China, at a time when global growth is facing increasing downside risks, as per the World Economic Outlook released by the IMF in April 2016.

Since we are already growing, now is the right time to leverage the Chinese slowdown to our advantage. India can surely benefit from the opportunities it has by focusing on the following-

Make in India: With the government of India giving a lot of weight to the ‘Make in India’ campaign, this may be the time to provide impetus to manufacturing and invite Chinese companies to set up a manufacturing base in India.

Growth center to invest: A slowdown in the Chinese economy would also mean that the global finance and capital market would look for new growth centers to invest in. The government should invest in infrastructure like roads, railways etc. and introduce reforms to improve business conditions in India. By providing an attractive alternative to China, India can have a much bigger pie of the global capital, which in any case it needs to fund its huge infrastructure capital requirement.


Stem the rupee’s fall: A bigger concern that arises from the Chinese devaluation is for the Reserve Bank. RBI governor, Raghuram Rajan, who had been giving warning against the “beggar thy neighbor” policies, may have to alter rate decisions in order to keep up with the global environment. The Reserve Bank of India could sell dollars in the market to increase the rupee’s value. There are several other measures possible that range from floating a sovereign bond to raise money from NRIs to making the import of luxury goods costlier by imposing duties on them.

Anti-dumping duty: The steel industry and the government, both are worried over dumping from China. So far, there have been 322 anti-dumping cases in 2015, of which 177 cases involve China. The Finance Ministry has imposed antidumping duties on the import of hot-rolled stainless steel (HR SS) flats of grade 304 originating from China, Malaysia and South Korea. The anti-dumping duties will be effective for a period of five years starting 2015. India consumes about 1 million ton of this type of stainless steel and more than 40 percent of that is imported, mainly from China. The anti-dumping duty can also be extended to the 200 grade stainless steel as it commands a market share of more than 50 percent in India.


The impact of China’s slowdown on India would depend on many factors such as lower input prices, intensity of competition from cheaper imports and the pace of global growth. The speed at which we go ahead with the reforms is very important. It is not a matter of global economy slowing down, but how India speeds up its reforms. India will have to come to grips with the fact that in an integrated world, much is beyond its control and it needs to focus on the things it can change – boosting investments and generating jobs.


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About the author:

She is a PGDM finance student of batch 2015-17 at TAPMI. Her area of interest includes economic research and risk management. You can contact her at priyankam.17@tapmi.edu.in