Online retailers clocking record sales this festive season have triggered hopes of a sustained revival, but data from India’s banks and factories seem to tell a story of an economy caught in a peculiar flux.
Banks are awash with funds but corporates aren’t taking any. Plants have large spare capacity and companies have a stockpile of unsold goods.
The statistic is telling. In the 12 months from August 2015 to this year, industrial loan growth has crashed more than five percentage points.
As of August this year, total bank loan to industry stood at Rs 26.18 lakh crore from Rs 26, 23.80 lakh crore in August 2015, recently put out Reserve Bank of India (RBI) data show.
This, however, broadly coincides with the period when India firmly cemented its position as the world’s fastest growing major economy, outpacing neighbouring titan China.
According to analysts, firms were expanding at a slower pace because of unused capacities, large enough to meet extra demand for goods.
RBI’s findings backs this argument. The latest quarterly industrial outlook survey, indicated a moderation in “in the sentiments in demand conditions,” in July to September compared to April to June 2016.
“On a net basis, percentage of respondents favouring an increase in production, order books, capacity utilization and exports/imports was lower in this quarter,” the RBI survey said.
The survey, conducted among 723 manufacturing companies during August-September, is aimed to assess the current business situation and outlook in the near future.
Nearly 8 out of 10 respondents (78.4 percent) were of the view that their plants had adequate production capacity to meet additional demand in the next six months, while 14.2 percent believe that their capacities were “more than adequate” to meet any sales spike in the coming months.
“Although respondents to the July-September 2016 industrial outlook survey expect input costs in manufacturing to increase, corporate pricing power will still be stunted due to the slackness in demand and spare capacity in the manufacturing sector,” India Ratings, a ratings and research firm, said in a recent report.
Within the industrial sector, the fall in loan growth has been the sharpest in food processing (-9.24 percent), followed by beverage and tobacco (-8.04 percent) and cement (-4.27 percent).
The scrutiny over mounting bad loans and tighter norms may have slowed down bank credit growth.
India’s banks have been beset with mounting bad loans. In the last 12 months, for 39 listed banks, gross non-performing assets (NPAs) rose 96 percent between—to Rs 6.3 lakh crore in June 2016 from Rs 3.2 lakh crore in June 2015.
“The manufacturing sector is beset with low capacity utilisation, while corporate balance sheets are stretched and banks are saddled with bad assets,” the India Ratings report, quoted earlier, said.
Analysts, however, expect household spending to pick up. Good summer rains this year will likely raise farm income, pushing up sales of goods such as televisions and cars.
Analysts also expect a hike in salaries and pensions of 4.8 million central government employees and 5.5 million pensioners to boost spending on cars and houses.
“Private consumption is expected to receive a further boost in the coming quarters on the back of an expected improvement in rural demand led by a near-normal and well-spread monsoon,” Crisil, a credit rating and research firm said in a report.
“This, together with the implementation of the Pay Commission recommendations augur well for domestic consumption growth this fiscal,” it said.
A consistent rise in household spending should help in rapidly exhausting unused capacities in consumption-linked sectors.
“We believe investment revival would be triggered by sustained recovery in consumption demand and thus capacity utilisation and investment push by the public sector, leading to a virtuous cycle of cash flow generation in the system,” Motilal Oswal, a brokerage and research firm, said in an second-quarter earnings preview report.