A puzzling industrial credit-growth disconnect in FY17-FY19, Pg7

Key Highlights:

• The share of industrial credit in total bank credit has fallen from 42% in 2013 to 23% in 2024.
• The CAGR of industrial credit was only 4.1% during 2014-24, significantly lower than previous decades.
• Industrialized regions like western, southern, and northern India experienced lower industrial credit growth than the national average.
• A divergence occurred between industrial GDP growth and formal manufacturing sector growth (GVA-ASI) during 2016-17 and 2018-19.

Detailed Insights:

• The decline in industrial credit share is unprecedented in the last half-century, with the services sector benefiting, particularly through personal loans.
• The CAGR of 4.1% for industrial credit during 2014-19 remains consistent even when excluding the post-COVID-19 pandemic years.
• While the central and northeastern regions showed higher industrial credit growth, this is likely due to their smaller share of overall industrial credit.
• Bank credit as a proportion of India’s GDP has stagnated between 50%-55% since the early 2010s, contrasting with countries like Japan and China.
• The decoupling between industrial GDP and GVA-ASI during 2016-2019 suggests a possible overestimation of industrial GDP in the current NAS series (2011-12).
• The correlation between industrial credit and ASI-GVA growth was strong between 2004-2020, reaching 0.82, highlighting the anomaly of the 2016-2019 period.
• The IMF downgrading India’s GDP estimates to ‘C’ status further emphasizes the need to investigate the causes of declining industrial credit growth.

Key Concepts Involved:

• Industrial Credit: Loans and advances provided by banks to industries for various purposes like capital expenditure and working capital.
• GVA-ASI (Gross Value Added - Annual Survey of Industries): A measure of output from the formal manufacturing sector, reflecting the value added in production.
• NAS (National Accounts Statistics): A comprehensive system that measures the economic activity of a nation, including GDP and related aggregates.