After a slew of depressing data on gross domestic product (GDP), industrial production and exports, the latest numbers on bank credit growth offer reason for hope. Growth in non-food credit during February was Rs28,843 crore, a huge improvement over the decline of Rs13,562 crore witnessed in January. What’s more, it’s the biggest increase in non-food credit in the last five months.
There has been a lot of evidence of a turn for the better in the micro numbers. Recent data on cement despatches and car sales indicate a pickup in demand. Tata Steel Ltd has reported a 47% jump in sales in February. The resilience of the rural sector has been reflected in the sales of two-wheelers and in the continued growth of new telecom connections. The flip side of the wholesale price data, which show that the prices of food and other primary articles have remained stubbornly high, is that it’s also an indicator of continued strength in the rural sector. But the micro data had so far not been confirmed by the macro numbers, which were uniformly gloomy. The February ABN Amro PMI survey, for instance, showed that the manufacturing sector contracted from the previous month. Similarly, the Organization for Economic Cooperation and Development (OECD) composite leading indicator for India, which is supposed to show turning points in the economy six months in advance, continued to fall in January.
Also See Taming Credit Crunch (Graphic)
But the latest credit numbers provide the first confirmation from the macro data that the economy has bounced off its lows.
Of course, the increase in non-food credit in February 2009 is much lower than the rise posted in February 2008. Nor, to put it in perspective, is it anywhere near loan growth in China, where new loans more than quadrupled in February from a year earlier.
Part of the loan surge in India will be on account of pre-election spending. Part of it will reflect year-end expenditure of government departments. And analysts say that part of the reason is that firms are resuming production after running down their inventories in earlier months. Or it may just be that the economy is finally recovering from the severe credit crunch of the last quarter.
That election spending has picked up is evident in the “currency with the public” component of money supply, which has surged in the last two months.
Also See Election Spending (Graphic)
Since a large part of election spending is in cash, it’s reasonable to expect a rise in “currency with the public”, which increased by Rs12,080 crore in January and Rs16,376 crore in February. That’s more than the rise of Rs3,998 crore in January 2008 and Rs15,018 crore in February 2008. In normal times, one would have expected currency with the public to fall during a slowdown, as people curb spending. The fact that it has gone up compared with the previous year in spite of a deep slowdown is probably on account of election spending.
Nevertheless, the large increase in non-food credit outstandings compared with previous months is positive. It reflects the success of the government’s efforts to get the public sector banks lending again.
There is, though, one unintended consequence. Bank investment in government securities has fallen sharply in recent times. Here are the numbers: February Rs21,637 crore; January Rs17,808 crore; December Rs42,225 crore; November Rs36,132 crore; and October Rs90,160 crore. Notice that bank investment in government securities in January and February was only half of the amount invested in the previous two months, which in turn was lower than the amount invested in October. Therein lies the secret of the fall in the prices of government securities and the consequent steep rise in yields.
Banks are not buying at a time when government borrowing has increased. Supply is up, but demand is down.
Graphics by Paras Jain / Mint
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