Graphic: Prajakta Patil/Mint
Graphic: Prajakta Patil/Mint

Economy may be improving, but credit growth is sliding

Only when credit growth picks up that we'll have confirmation the economy has finally started to pick up

Everybody agrees the economy is getting better. The gross domestic product (GDP) growth number for the June quarter, to be announced on 29 August, should show decent expansion. The Purchasing Managers’ Indices (PMIs) are showing expansion, the The Organisation for Economic Co-operation and Development’s (OECD’s) composite leading indicator for India presages a turnaround.

Unfortunately, bank credit data gives us a completely different picture. The year-on-year growth in bank lending has not only failed to pick up, but has fallen quite a bit instead (see chart).

One explanation could be higher borrowing from abroad. Another could be that companies have tapped the equity markets for their needs. And of course, the ultimate consolation is that credit growth is a lagging indicator, as companies draw down their inventories first before approaching banks for funding.

On the flip side, it’s possible that banks, up to their necks in bad debt and recent revelations of scams, are wary of lending.

True, there is also a base effect, because lending growth accelerated last year in August. But that’s par for the course, as credit picks up when what used to be called the busy season approaches. In the current fiscal year up to 8 August, bank credit growth has been 1,346 crore, well below the growth of 2,293 crore during the same period last year.

Given the dubious quality of much economic data, it’s only when credit growth picks up that we’ll have confirmation the economy has finally started to pick up.

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