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Credit and Growth

Credit positive
Following a briefing few months ago at the CEO Forum in Bangalore a client from the construction machinery sector explained to me that, contrary to some of the data I had shared, his business simply couldn’t be better. The Government’s push on infrastructure spending such as that concerned with roads and railways was substantial and, consequently, so was demand for engineering equipment. However, this cannot take away from the fact that other industries such as real estate and housing are in dire straits. Markets, which were in any event moderating, collapsed completely following the November scrapping of currency notes. Industry specialists do not believe that a recovery will happen anytime in a hurry. In some ways therefore, the outlook for the economy and business would seem to vary depending on who is asking.

Data produced by the CSO suggests industrial output rising by around 5%, with better scores in Services at 8%. Agriculture has done unusually well at 4.7% and all put together annual growth is expected to be anywhere between 7% and 7.5%. Sceptics have wondered how such figures could be reconciled with data on credit growth. Based on figures released by the Reserve Bank of India, credit growth to Industry has actually been negative. In 2010, on the other hand, it was growing at 32%. I have previously argued that the flow of credit is rather like the lifeblood of the economy and lending institutions are like its heart. By this logic, if credit falls, then the economy simply cannot grow. However, as we discovered when we examined the data, this no longer appears to be the case.
The new financial catalyst of the Indian economy is the bond market. The role of banks whilst critical is not overwhelming, as it was in the past. For instance, in 2010-11, bank credit grew by Rs 6.3 trillion. The bond markets added under a trillion to fresh credit supply taking the total to Rs 7.2 trillion. In the year 2016-17, these figures stood at Rs 5.7 trillion and Rs 3.9 trillion respectively. This aggregates to Rs 9.6 trillion which is impressive in itself; however, the more notable statistic is that the bond markets contributed to over 40% of total new credit, up from barely 13% in 2010-11.
The assumptions by analysts have instinctively been based on bank lending, which from the figures referred to in a previous paragraph has dropped worryingly. But a comparison of aggregates quite cheerfully suggests a different picture. In 2016-17, total credit almost doubled over the previous year’s Rs 4.9 trillion. This is an exceptional rate of growth and, even allowing for the fact that it is inconsistently high on account of the low figure of FY16, would suggest that the economy may be at a point of inflection with growth likely to improve in the coming years. It is true that access to the bond markets is both difficult and expensive and by that logic unavailable to some sections of industry. To that extent, economic recovery may not be uniform or broad based. However overall investment performance and growth should, by and large, record a more robust trend going forward.

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