Finance Minister Arun Jaitley must be a happy man. Vindicating IMF and World Bank’s high GDP growth projections for 2018-19, India’s investment scenario has improved considerably. Reflecting the trend the non-food credit flows of banks to commercial sector have increased steadily in recent months.
After remaining depressed for nearly two years, credit flows started rising since June 2017 and increased to double digits last December. The resurgence in credit growth was observed across bank groups, though the pace of growth continues to vary among bank groups. The year-on-year growth rate of bank credit for scheduled banks was 11.1% as on March 16, 2018.
The private sector banks were the biggest beneficiaries with an increase of 21.5%. The credit flow of public sector banks was 6.7%. What is significant is that the credit growth is becoming increasingly broad-based, with off-take by industry turning positive after a protracted period of contraction. The industry groups which witnessed sharp improvement in credit flow on a y-o-y basis include mining and quarrying, food processing, textiles, chemicals, and rubber, leather, glassware and engineering industries.
The growth in non-food credit extended by scheduled commercial banks reached a low of 5.8% at end-March 2017, the lowest since 1994-95. A combination of factors drove down credit growth despite softening of lending rates – the subdued state of economic activity risk aversion in the banking sector with a legacy of NPAs and capital adequacy requirements acting as a binding constraint on banks; and disintermediation via increasing recourse to market-based instruments, such as commercial papers and corporate bonds.
Bank lending in India accounts for about 50% of the total flow of resources to the commercial sector. In a bank-based economy, bank credit is considered critical in determining output. Higher credit growth is expected to lead to higher GDP growth.
The biggest reason for the growth in bank credit must be better performance of the industrial sector. The index of industrial production has grown at over 7% in each of the last four months from November 2017 to February 2018. Industrial output grew 7.1% in February compared to 1.2% in the same month a year ago. The cumulative growth for the period April-February 2017-18 over the corresponding period of the previous was 4.3%.
The manufacturing sector did even better with an increase of 8.7%. Manufacturing output grew by just 0.7% in February 2017. What is important is that the manufacturing growth this time was far more broad-based. Some 15 of the 22 two-digit industry groups have witnessed an increase in output. As many as 10 of them have recorded a more than 10% output growth.
And if higher growth in the manufacturing output was the reason behind the increase in bank credit, it will help the economy to achieve higher GDP growth. But more than that better manufacturing performance has encouraged our industrialists to go for newer projects.
Following better industrial performance there has been a spurt in investment proposals. As many as 295 IEMs were filed in February 2018 with a proposed investment of Rs.86,231 crore. More number of IEMs was also implemented recently following an industrial recovery. In December 2017, for example, a record 571 IEMs was implemented entailing an investment of Rs.71,396 crore.
Although it is early, the higher credit flows to the commercial sector and an increase in the number of IEMs filed and implemented indicate a turnaround of the industrial sector.