The current crisis in the US, according to most observers, has its roots in a credit binge. Interest rates stayed too low for too long, leading to too many loans and a lowering of credit standards. The question is: Did we have a similar lending binge in India?
The table shows the rates of growth of non-food bank credit from 1991 onwards. We’ve taken the numbers as at end-May each year to eliminate the distortions that creep in at March-end because of window-dressing by banks. Since May 1991, or since the opening up of the economy, we have had two periods of very strong credit growth. One of them occurred in 1995 and 1996, when non-food credit growth increased at an annual rate of 25.5% and 23.5%, respectively.
The credit boom of the last few years, however, dwarfed the expansion seen in the mid-1990s, with rates of growth of non-food credit reaching a peak of 32.7% in May 2006. In real terms, that is, after adjusting for inflation, credit growth has been even higher in the recent past. For instance, while non-food credit rose by 25.5% in May 1995, wholesale price inflation went up by 10.98% that year. In contrast, when credit growth was 32.7% in May 2006, inflation was a tepid 4.7% or so. That shows that credit growth in real terms was even higher in 2006. As a matter of fact, credit growth is still higher than what it was in the mid-1990s, but much of that is due to hefty borrowings by cash-strapped oil companies.
Was the higher credit growth a result of the higher GDP growth during the last few years? The data doesn’t support that conclusion. In 1994-95 and 1995-96, GDP growth at current prices was 16.8% and 17.1%, respectively, while it was 13.8% in 2005-06. That’s not a very surprising conclusion: The fall in interest rates in the early years of this decade led to a consumer lending boom the likes of which had not been seen in this country before. Clearly, retail credit has been an additional factor boosting bank lending in the past few years, a factor that was absent in the mid-1990s. And some bank lending found its way into the asset markets.
There are several questions that arise when we consider the huge rise in credit in the past few years. One, will credit growth revert to the mean, which means, will it drop to the 12-14% levels seen after the boom of the mid-1990s? Two, to what extent will non-performing assets rise, especially since this is the first time we’re seeing the aftermath of a retail lending boom in this country? And three, to what extent was the credit boom responsible for the above-trend growth of the economy in recent years?
It’s true that the economy now is very different from that of the 1990s. But then, we didn’t have a global credit crunch nor a runaway rise in oil prices at that time. Anyway, we’ll know soon enough whether the hangover will be as impressive as the party.
Oil decouples from other commodities
International crude oil prices are following a path of their own, a trajectory very different from that taken by most other commodities.
As the chart shows, while crude oil prices have gone up by more than 40%, LME (London Metal Exchange) aluminium and lead prices have been more or less flat this year, while zinc prices have fallen 40%. Clearly, crude oil prices have decoupled from the rest of the commodity pack.
The data calls into question several recently touted theories. One of them is that the falling dollar is responsible for higher oil prices. The theory is that since oil is priced in US dollars any fall in the dollar increases the price of oil. Perhaps, but base metals too are priced in dollars and the falling dollar hasn’t really boosted their prices.
It’s also strange, if it is demand from emerging markets that is boosting the price of oil, why the same logic doesn’t hold for base metals.
Similarly, if funds are flowing out of equities and into commodities the only space in which they’re making big profits seems to be oil. In other words, the speculation appears to be occurring only in oil and not in other commodities.
Simply put, the charts seem to show that supply factors are behind the rise in oil prices. At the very least, the factors behind the rise in crude prices are very different from those behind other commodity prices.
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