Credit growth is usually seen not as a leading indicator of economic growth, but as a coincident indicator, which means that the two run together.

So far, analyses have usually concentrated on checking whether there has been a slowdown in credit growth. Because the credit data are available on a biweekly basis, while the gross domestic product (GDP) data are published quarterly with a lag of several months, the credit numbers become a leading indicator of growth in the economy.

But surely credit growth should be roughly in the same proportion as GDP, in the sense that rising GDP should imply rising credit growth. In a developing country, it’s also reasonable to assume that credit growth should actually be a rising proportion of GDP, as more and more people start accessing the banking system.

However, the data for the year until end-September show that while credit increased by Rs3.71 trillion over the period, GDP during the period (factor cost at current prices) was Rs39.87 trillion. Simply put, credit growth was 9.3% of GDP. That is well below the 11.5% of GDP notched up in the year until September 2006 and even lower than the credit growth/GDP ratio of 9.5% during the year until September 2005.

On the other hand, deposit growth as a percentage of GDP was 10.2% as at end-September 2005, moving up to 11.3% a year later and to 14.1% for the period ending in September.

The data show that domestic credit is responsible for a smaller proportion of economic growth during the current year, which means that growth is increasingly being funded by other sources. This includes external borrowings or equity issues. As far as deposits are concerned, foreign fund inflows have led to a rise in deposit growth, which has kept liquidity conditions relatively benign despite a series of tightening measures by the central bank. The high incremental deposits-to-GDP ratio is a reflection of easy liquidity among banks.

Eicher-Volvo JV

Shares of Eicher Motors Ltd have corrected by 22% from an intra-day high of Rs599 on the Bombay Stock Exchange after the company announced a joint venture (JV) with the Swedish Volvo Group. This gives the impression that minority shareholders have got a raw deal, but before coming to that conclusion, note that Eicher’s share price had risen 57% in less than a month on the expectation of a buyout and a subsequent open offer. Minority shareholders are disappointed that they haven’t got a lucrative exit option through an open offer.

Essentially, Volvo’s buying a 50% stake in Eicher’s commercial vehicles (CV), components and engineering design services business, which together accounted for 90% of Eicher Motors’ revenues in the past 12 months. One option could have been to buy a 50% stake in Eicher Motors, a move which would have triggered an open offer to minority shareholders. But the agreement to carve out the CV, components and engineering design services business into a JV company, in which Volvo would then buy a stake, avoids the open offer and hence lowers the cost of the transaction.

Some analysts are disappointed that the JV structure would make Eicher Motors a holding company, which erodes value for shareholders. In the near term, the earnings attributable to shareholders of Eicher Motors will reduce. Once the deal is sealed, they would have only a 54.4% stake in the earnings of the CV and related businesses—down from 100% currently. Volvo’s truck distribution business in India, which will be merged into the JV, would hardly make up for the loss of earnings given its small size.

But that’s taking a short-term view of things. Volvo is also bringing in $275 million (Rs1,084 crore) in cash to the JV, which will help it expand capacity and reach in the CV space.

Currently, the two companies put together have a market share of less than 3% in the key heavy commercial vehicles segment. Once the JV is operational (expected to be mid-2008) and the investments are made, sales of the Eicher-Volvo Group are likely to be much higher, compensating for the reduction in the share of minority shareholders.

Eicher’s CV business was enterprise-valued at $506 million, a decent valuation considering that the entire firm had an Ebitda (earnings before interest, tax, depreciation and amortization) of only Rs128 crore in the past 12 months until September.

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