BackThe Indian economy will be marked by contradictions
Prepare for global gloom and the risk of retail loans going bad just as corporate credit picks up in India
PremiumAs India’s winter of discontent gets harsher, multiple contradictory signals from both within and without promise to fog up the dashboard in 2023. India’s general elections, scheduled for 2024, will also bring in their wake high-pitched rhetoric and spin-doctoring to further muddy the waters. In short, buckle up because the next 12 months promise a flurry of conflicting signals and a rather bumpy ride.
One conflicting signal is already staring us in the face: the seemingly doomed future of globalization. Post-Brexit, the covid pandemic and Russia-Ukraine conflict, there are multiple signs indicating retrenchment of globalization. The collapse of global supply chains due to economic lockdowns has refocused attention towards near-shoring or on-shoring. In an associated move, nations have erected protective trade barriers; both the US and EU are using climate plans to renege on free-trade promises. The end result: reduced global trade.
Various financial institutions across the globe are trying to wrap their heads around the phenomenon. According to BlackRock Investment Institute’s 2023 Global Outlook, “We see geopolitical cooperation and globalization evolving into a fragmented world with competing blocs." Citi’s wealth outlook for 2023 intoned ominously: “A less globalized, more polarized world presents challenges for investors."
At the same time, somewhat counter-intuitively, some other facets of globalization will continue apace, unleashing their disastrous effects on the global economy. As US employment numbers and demand data continue to stay elevated (despite, paradoxically, slowing growth), the Federal Reserve is likely to be unrelenting in its endeavour to bring the inflation rate back to 2%. The Fed’s actions will undoubtedly strengthen the dollar further, forcing many central banks across the global economy to raise interest rates in tandem. Interestingly, central banks in emerging economies today face threats to their independence from an external agency and not from the political dispensation at home.
Beyond interest rates, inflation also travels easily across national boundaries, especially through food and fuel trade. The fractured supply chains and war in Europe have ensured that inflation’s harmful impact might sustain through 2023; as political scientist Ian Bremmer writes in the 16 January edition of Time magazine, “It (inflation) will be the key driver of global recession, add to market volatility and financial stress, and produce disruptive effects on politics in every region of the world."
The other undesirable effect of globalization could be the persisting effect of the Omicron variant that has travelled seamlessly from one corner of the world to another. The Indian government has been forced to resume random screening of passengers arriving from different parts of the world to test for the numerous Omicron variants that have witnessed a resurgence in recent times.
India, it goes without saying, will be adversely affected by both trends. Interestingly, many conflicting signals also abound at home and have the potential to impart volatility to growth impulses and financial-sector stability. Here is one example.
Indian equity markets have been soaring since early 2020, once the initial shock of the covid pandemic was negotiated. Cross-country comparisons across emerging markets by various valuation indices show the Indian market to be considerably over-priced currently, both relative to its own past performance as well as compared with the rest of the world. Interestingly, the market held its own despite foreign portfolio investors (FPI) pulling out money over the past few months. Domestic investment institutions and retail investors are believed to have kept the market valuation up. But below this cheery visage lies a grim reality.
Sectoral credit deployment data from the Reserve Bank of India (RBI) shows credit growth in commercial banks in recent months has been driven by only two segments: non-bank financial companies (NBFCs) and consumer loans. A large chunk of the NBFC borrowing was also for on-lending to retail borrowers, given tepid industrial credit demand. RBI data for commercial banks shows consumer loans in four categories—advances against fixed deposits, advances against shares or bonds, loans against gold jewellery and other personal loans—grew by almost 71% between April 2020 and November 2022.
It is quite likely that a large proportion of these loans have found their way into stock markets; the Nifty-50 index gained close to 118% between April 2020 and November 2022, at a time when FPI investments during the same period witnessed a net inflow of only ₹1,464 crore. This situation can become unviable during a rising interest rate regime. RBI’s Financial Stability Report for December 2022 acknowledges it: “The increase in policy rates and impact of pass through on overall asset quality, however, requires closer monitoring." Its latest Report on Trend and Progress of Banking in India also echoes this: “Empirical evidence suggests that a build-up of concentration in retail loans may become a source of systemic risk."
It will be a pity if banks are confronted with rising retail loan delinquency, just around the time when corporate credit demand picks up in response to the Centre’s continuing emphasis on capex. It would be a terrible blow to growth and stability.
Rajrishi Singhal is a policy consultant and a senior journalist. His Twitter handle is @rajrishisinghal.
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