Column : Industry’s new best friends

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Column : Please don’t do much

: To run an industry you need money. You go to a guy who has the dough and hope to interest him enough to lend you some. If the investment works out, you pay him back (hopefully).

So, if this chain works out there are two things that should happen? The industry should expand as it works through more and more of that finance. Simultaneously the fellow who lent his money to you should see his book expand.

But if one looks at the data for the Indian economy now, this is not happening. Or rather it is happening at one end and not the other. The Prime Minister’s Economic Advisory Council is sure the industrial sector will expand by at least 10% through this financial year from September to March. The figures rolled out by the Council on Wednesday say the index of industrial production will average 8.2% in 2009-10, up from 3.9% in 2008-09.

This should therefore mean by now there should be a sizable expansion of credit from the banking sector to industry. Otherwise one has to wonder how industry is planning to finance the double-digit growth rate the Council is so sanguine about.

So, if we were to assume the growth rates postulated by the Council will work out and indeed as they have done in the past, then where does industry source the finance from?

The latest fortnightly data on bank credit to all sectors including industry, agriculture and services as per RBI shows a growth of only 12.6%, year-on-year. RBI data shows industry—broadly defined as the manufacturing sector—accounts for about 38 % of this. But even cutting out that distinction, the aggregate sum is just half of the 25.2% growth provided by the banking sector to industry in the same period last year. With an average inflation of 4.5 % for the year, the net growth of bank credit is just about 8% this year.