India’s back! And a credit growth of 6.6% confirms this

MSMEs, farmers, individuals, NBFCs avail of loans for a wide range of purpose and provide a strong fillip to consumption. But credit to large industries still lags. So, even as there is cause for cheer, there remains a need to carefully monitor the economic situation.

After loads of anecdotal data from sectors such as automobiles, steel, fast moving consumer goods and cement, among others that supports the view that the economy is on the mend, there is no more fundamental information that corroborates this impression.

Bank credit, which lies at the core of economic activity in every sector, is growing – suggesting that the wheels of India’s Covid-hit economy are beginning to roll faster than before. As the process of unlocking various industries gathers momentum with returning workers and rising consumption demand, is the demand for loans. At an aggregate level, loan disbursals in the five-month period between September 2020 and February 2021 jumped by as much as 50 per cent over the previous corresponding, Reserve Bank of India (RBI) data showed.

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Banks lent has much as $70 billion during the September 2020-February 2021 period, a sharp increase over the figure of $46 billion during the previous corresponding period. This is more significant as the September 2019-February 2020 period preceded the Covid outbreak-induced total lockdown which had brought economic activity to a total halt.

Even if one considers overall credit growth, as of February 26, the figure was 6.6 per cent higher compared to an increase of 6.1 per cent in 2020.

Indian companies are regaining their mojo

Based on this data, it is fair to infer that Indian companies are once again beginning to operate at or above the capacities they had achieved earlier. This will support the projection that the nascent recovery seen in the Indian economy has got over the festival bump and pent-up demand scenario and is now sustaining on its own steam, supported by a healthy consumption demand.

When Finance Minister Nirmala Sitharaman announced her stimulus package for the economy last May, it was met with howls of protests from many habitual naysayers who have turned criticism of the Modi government into a cottage industry. They derided it as inadequate and its supply side focus as completely off the mark.

FM’s relief package comes to the rescue

But it is this much maligned package, especially for the beleaguered micro, small and medium enterprise (MSME) sector, that is now coming to the rescue of the economy. The Finance Minister had announced a $40-billion Emergency Credit Lending Guarantee Scheme (ECLGS) of collateral free loans for MSMEs, which was twice extended from October 31, 2020, first to November 30, 2020 and then to March 31, 2021 to help revive this sector, which accounts for 45 per cent of India’s manufacturing GDP, 40 per cent of exports and 23 per cent of total employment.

“ECLGS disbursements at Rs 1.6 lakh crore ($22 billion) in the first nine months of this fiscal have lent support," Ratings firm Crisil, the Indian subsidiary of global ratings giant S&P, said in a report.

“Credit to medium industries registered a robust growth of 19.1 per cent in January 2021 as compared to 2.8 per cent a year ago and credit to micro & small industries registered a growth of 0.9 per cent in January 2021 as compared to 0.5 per cent a year ago,” a report on RBI’s website said.

Good monsoons played a key role

Granular data from RBI suggests that the good monsoon is generating very good demand for credit in rural India. Fresh sanctions of farm loans have crossed the $14 billion mark and credit growth to the agricultural sector has expanded 9.9 per cent in January compared to 6.5 per cent the previous year.

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Some new heads of loans – such as loans against gold (up 132 per cent), bank lending to non-housing finance NBFCs (up 150 per cent), social infrastructure (98 per cent) and aviation (120 per cent) – have risen around 100 per cent or more so far in 2020-21.

NBFCs on the mend

There were also signs that NBFC, which play a vital role in the last mile delivery of credit in India, are also on the mend. “NBFC, after having consolidated for almost 2 years now, significantly deleveraging the balance sheet by running down high risk profile assets, are now more confident to pursue growth opportunities in a risk-calibrated manner,” an ICICI Securities report said.

Some cause for concern as well

However, the economy is not entirely out of the woods. Credit growth to largescale industry remains a cause for worry. the RBI said: “Credit to industry contracted by 1.3 per cent in January 2021 as compared to 2.5 per cent growth in January 2020 mainly due to contraction in credit to large industries by 2.5 per cent (2.8 per cent growth in January 2020).”

Thus, there is some cause for cheer, but policymakers and analysts will be keeping a very close watch on the Indian economy in the coming months to see whether the uptrend can be sustained into the long term.