At 10.8%, growth in infra credit is back to FY15 levels; economy is riding on the back of govt spending

Does a recent spike seen in bank lending to infrastructure offer early signs of recovery in the economy? In the first nine months of financial year 2019, credit growth to infrastructure sector stood at 10.8 percent, growing at double digits after a gap of four years. For clarity, let’s look at the growth figures in the previous years. In financial year 2018, credit growth to infrastructure contracted by 1.7 percent, in FY17 by 6.1 percent and in FY 16, infra credit grew by 4.4 percent. In FY 15, the growth was 10.5 percent and that’s the point to which growth has returned now. Its not just infrastructure loans, overall lending to industry too has shown a reviving trend after staying in the negative for two consecutive years. Credit to industries grew by 1.9 percent in the first nine months of this fiscal year. While this is no significant jump, one must remember that the credit growth to industries was flat in FY 18 (0.7 percent) and was negative in FY17 (-1.9). [caption id=“attachment_2296472” align=“alignleft” width=“380”]  Representative image. Reuters[/caption] One reason why banks shut doors to industry in recent years was risk aversion following increased scrutiny by the Reserve Bank of India (RBI). Following the NPA-clean up programme and punitive provisioning imposed on banks which failed to disclose bad loans, banks were more keen to focus on low-risk retail loans instead of large non-retail loans. Lower demand in a slowing economy and absence of fresh private investments in large projects too added to low credit off take. Banks may, however, be re-looking at these projects again with much of the pains behind them and government’s infra push has contributed to the revival. Contradictory signals What is puzzling is that while there is a revival in bank credit to infrastructure and industries, suggesting recovery in economic activity, that revival signal is not shown in the factory output numbers. Since June, 2018 (7 percent), the Index of Industrial Production (IIP) has been falling consistently, with the only exception being October, 2018 when the index recorded a sudden spike of 8.4 percent. In January, 2019, when the latest set of the IIP data was out, the reading was 1.7 percent. There are no signs of demand-revival yet. Recently, the country’s leading car manufacturer Maruti Suzuki reportedly slashed production by nearly 27 percent in March due to sluggish demand in passenger car market and tougher emission norms, which are to come into effect from next year. Maruti Suzuki has reportedly cut its car production by 26.8 percent to about 126,000 units in March as compared to more than 172,000 units during the same period a year ago. A number of ground reports also show that an unemployment crisis is unfolding in India. Having said that a revival in bank credit growth to infrastructure sector for projects primarily funded by the government after a fairly long lull phase tells us two things. One, there is some pick up in investment activity in the labour-intensive infrastructure sector on the ground which is a positive news for the economy. Second, it is even more clearer now that the onus to bring back the growth momentum in the economy rests with the public sector, since most of these infrastructure projects that have caused a revival in the credit demand are funded by the government; there is no aggressive participation from the private sector. At this point, government spending is the primary factor that is supporting the economic recovery. (With data support from Kishor Kadam)