RBI data belies optimistic govt data: More reforms needed to ring in 'achche din'

There is some good news and some bad news to welcome the New Year. The good news is that data released by the government data on Wednesday showed that the output of eight core industries hit a five-month high in November, growing by 6.7 per cent, mainly propelled by growth in cement, electricity and coal. While coal output grew 14.5 percent, cement output grew 10.2 percent and a robust growth was seen in the electricity generation as well, which grew by 10.2 percent. This is clearly an encouraging trend and should give one the optimism that things have started moving on the ground. And the bad news is, for some reason, the Reserve Bank of India (RBI)’s numbers on credit growth to various sectors, released on the same day, doesn’t seem to share the optimism on what is actually happening on the ground. Banks continued to keep their doors shut and have not done any serious lending to medium and large sized companies in the first eight months of the fiscal year, reminding the harsh reality that fresh demand — a direct indicator of revival in economic activities — is yet to take shape on the ground. To be precise, bank credit growth to medium-sized companies further shrank by 1.3 percent in the March-November period as against 0.9 percent in the corresponding period last year, while that to large-sized companies grew by just 0.8 percent as against 6.2 percent in the year-ago period. [caption id=“attachment_2025789” align=“alignleft” width=“380”]  Reuters image[/caption] The only areas, where some growth has happened are lending to individuals for purchase of consumer durables. The growth in this segment, during the period, stood at 14.3 per cent, a tad lower than the year-ago period. On a year-on-year basis, loans to consumer durables grew by 47 per cent in the 12 months until November as against 33 percent in the corresponding period last year. The decline in loan growth to the infrastructure is visible, which has shrunken to 5.7 percent from 8.9 percent in this fiscal. What this data basically means is that the optimism post the arrival of Narendra Modi-government at the Centre and the expectation of ‘achhe din’ he promised have at least encouraged individuals to spend more. But, despite the positive aura created by the government and its business friendly moves taken so far, nothing really has changed for the companies until now as pointed out by the bank credit growth trend. This, in turn, clearly says things haven’t changed on the ground as far as fresh projects are concerned. Even the existing projects, which are stalled for various reasons, are yet to come back on track. Had that been the case, banks would have happily lent money to companies, since they are flush with cash and there are hardly any avenues to deploy the money. Absence of loan demand has been hurting banks since deposit mobilization has been much higher than that of credit growth, resulting in high carry cost of money. The even more worrying news is state-run banks, which control 70 percent of the banking system, may find themselves in somewhat difficult position to lend for large projects, even if one assumes there will be recovery. There is immense capital burden awaiting them in the days ahead due to mounting bad loans and Basel-III compliance, limiting the headroom for large-scale lending. The only way to avert such an eventuality is a massive capital infusion from the government. Indian banks need about Rs 2.5 lakh crore to comply with Basel-III norms alone. There are no signs yet of bad loans declining on their books, which could add to the resultant capital burden. Banks need to set aside money to cover bad and restructured loans and this weakens their balance sheets. According to the latest financial stability report of RBI, gross non-performing assets of banks are at 4.5 percent of their total loans now and this could very well go up to over 6 percent by 2016, if things do not improve in the economy. To be sure, the Narendra Modi government is making efforts to kick-start the economic growth engine by addressing project implementation issues, simplifying labour laws and land acquisition rules for industries. This is something both Modi and his finance minister Arun Jaitley has repeatedly promised. But even if they do what they say, revival in the real economy will come with considerable time lag, necessary for legislation and implementation of the new rules. Between now and then, the government will have to increase public spending and pump in money to state-run banks to keep the spirit of the economy alive. The prime minister has clearly succeeded in bring back the momentum lost in the economy during the 10-year rule of the UPA government.