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India’s economy, on the upswing

The International Monetary Fund has recently upgraded India’s GDP growth forecast to 6.3 per cent for 2023-24, up 40 basis points from its April forecast. The RBI’s forecast remains unchanged at 6.5 per cent. While the latest geopolitical conflict in West Asia may have opened a pandora’s box, we still believe the Indian economy could grow at a faster pace than expected. Our growth projection for the full year is at 6.7 per cent.

Let us first assess the economic momentum in the second quarter (July-September). While the RBI is projecting growth at 6.5 per cent, our tracking of the latest leading indicators suggests the possibility of the economy growing at a faster pace. The long-term trends suggest that whenever the percentage of leading indicators showing acceleration in a quarter crosses the threshold value of 70 per cent, the GDP growth numbers surprise on the upside. Currently, this is at 80 per cent, increasing the possibility of growth surpassing 6.5 per cent in Q2 FY24. The nominal GDP growth could well be in the range of 8-8.5 per cent and given that the GDP deflator is currently tracking at 1.5-2 per cent, a 6.5 per cent or higher growth looks eminently achievable.

The reasons for our optimism are four-fold.

First, the monsoon. While the overall rainfall was 6 per cent below the expected during the monsoon season (due to 36 per cent deficit rains in August), the spatial distribution is quite even. Out of 36 states/UTs, 29 received normal/above-normal rains. The SBI Monsoon Impact Index, which considers the spatial distribution, has a value of 89.5, faring much better than the full season index value of 60.2 in 2022.

Second, the thrust on capital expenditure continues. During the first five months of the current year, the capital expenditure of the states as a percentage of the budgeted target is at 25 per cent, while the Centre’s is at 37 per cent. Nearly all states are on a spending spree, with Andhra Pradesh leading the pack, spending as much as 51 per cent of the budgeted amount.

Third, the robust new companies’ registration depicts strong growth intentions. Around 93,305 companies were registered in the first half of 2023-24 as compared to 59,241 five years back. It is interesting to note that the average daily registration of new companies increased to 622 in 2023-24 (an increase of 58 per cent) from 395 in 2018-19.

Festive offer

Fourth, what is revealing is the continued traction in credit growth. All scheduled commercial banks’ (ASCB’s) credit growth (year-on-year) has been accelerating since early 2022. Aggregate deposits grew by 13.2 per cent and credit by 20 per cent (without HDFC it was 15.3 per cent, but still broadly similar to FY22) till September. In the coming months, we expect credit demand to remain robust due to the festive season.

There are many interesting facets of this continued traction in credit growth. The combined incremental growth in assets and liabilities of ASCB for the nine-year period that ended in March is at Rs 186 lakh crore. If we compare this incremental growth with the previous decade that ended March 2014, it was Rs 119 lakh crore. If we include the 2023-24 trends, the incremental growth for the banking system for the current decade ending March 2024 could be close to Rs 225 lakh crore — 1.9 times higher than the last decade. This incremental growth, even after accounting for the exceptional years of the Covid pandemic, is staggering.

We believe what is driving this credit growth is the rapid formalisation of the economy over the past decade. Those with no credit history are getting significantly integrated with the banking system. A back-of-the-envelope calculation suggests that the number of beneficiaries who have been either new to credit/deposit in the last nine years is at least 40 per cent on average (of the new credit accounts added during this decade ), contributing to at least 10 per cent of incremental credit growth. This is why we believe that there is a revolution at the bottom of the pyramid and this is likely to sustain the credit growth.

Doubts have been expressed about the jump in the outstanding credit card portfolio and the unsecured portfolio. But what does the data say? Household debt as measured by credit card outstanding per credit card in India has been either static or declining both in nominal and real terms (after adjusted for CPI inflation) in 2023. In nominal terms, the outstanding per credit card rose by 13 per cent in August, down from 24 per cent in January. The real outstanding per credit card growth in August declined to 5.8 per cent from 16.4 per cent in January. We thus believe that the hullaballoo about growth in unsecured loans is uncalled for now.

In fact, through schemes like PM SVANidhi, credible borrowers can have continued access to the financial system in the form of repeat loans (second loan at double the first loan, third loan at 5 times the first loan amount of Rs 10,000) provided that they have a good credit repayment history.

Programmes like Jan Dhan Yojana allow banks to meet the demand for credit for households that were operating outside the formal banking sector. We believe that the aspirations of such households are much stronger now and there is nothing to get alarmed at such trends.

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Lastly, this sustained healthy credit growth could continue to propel the economic momentum across the country.

The ASCB data for the period 2000-2010 indicates that bank credit grew at an average of 1.86 times of nominal GDP growth, during a period of high growth. However, in 2010-2020, the relationship weakened, and credit to GDP growth declined to 0.99 times, largely because of the severe asset quality issues of banks post the 2008 global crisis. The relationship broke down during the pandemic years of 2020-21 and 2021-22 as DP contracted.

In 2023-24, the credit to nominal GDP ratio may end up being around 1.7 times, up from 0.93 times in 2022-23, boosting the flow of funds to the broader economy, and helping to sustain the momentum. If the banking sector’s indicators are taken as a new normal, we are in for a sustained period of growth.
The writer is Group Chief Economic Advisor, State Bank of India. Views are personal

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