A fortnight?s drop in non-food credit from the banking sector would not automatically presage a decline in investment conditions. Yet, since the first week of July, credit growth rate has slipped 237 basis points despite a low base of 2009. At the same time, this year, quite a few major private sector manufacturing companies have announced more projects to manufacture stuff at foreign locations than within India. Would they be using local credit to finance those plans? There are no good data sets to get an answer either way.
Generalisations are always trying but it does seem that a number of companies are shutting down their bank loan window as of now. As a short-term replacement, the volumes for commercial paper have shot up to about Rs 11,000 crore on Thursday; as per Prime database, debt mobilised by corporate India through private placement in the first three months of 2010-11at Rs 56,169 crore is 31% more, year-on-year. The HSBC Markit Purchasing Managers? Index for August, which measures business optimism, has also declined somewhat. Admittedly, it is way above the 50% mark that separates expectation of growth from contraction.
Tally those numbers with the slowdown in kharif cropping this year compared with 2008. Rice acreage, for instance, has gone down to 318.75 lakh hectare from 345.75 (this is as per the agriculture ministry that is comparing this year?s acreage with 2009, which was a drought year, to show a rise). For two successive years, rural India will have less income to spend.
The credit numbers, in fact, would look worse if the telecom loans for 3G are netted out. That would shave off over 1% from the growth rate. So, corporate India is borrowing even less than what the headline numbers would indicate.
What these would mean for RBI is, of course, just anybody?s guess. Because there are also the contra set of numbers, those for inflation and GDP growth rate that show the economy is on a sustained uptick. One could choose any combination of these and more but the broad indicators are that of an uncertain recovery.
Beyond the recovery, the weak credit offtake posits a possibly larger concern. In the immediate short run, this relates to the continued high prices of raw materials. In bellwether sectors like steel and power, the prices of coking coal and even iron ore are high. They have been hit by the quarterly price contract system to which the international mining companies have migrated this year, from the annual price mechanism. Steel companies expect their bottom lines to be under pressure, as a result, for the next quarter. For downstream sectors like automobiles, these are causes for concern and will push up prices. Companies planning to go for capacity expansion or even greenfield projects will also bear the impact of these higher prices. Since domestic credit is not exactly cheap even now, the offtake is becoming muted.
The bigger structural problem that I touched upon earlier as just beginning to surface is the possible migration of manufacturing from the Indian shores. In this edition elsewhere, FE has carried a report of companies that have moved lock, stock and barrel to overseas fabrication, mostly to China. These companies have adopted a model where they manufacture the stuff abroad and brand it within India.
The numbers are building up for sure and will impact the Indian manufacturing landscape very soon. As an aside, the services sector, especially IT, has already seen a version of this phenomenon predicated upon the availability of cheaper labour. A recent Nasscom report has identified post-war Sri Lanka as a huge threat to Indian BPO operations. In the manufacturing sector, however, this could be a far bigger story.
The process will get support from three factors. As India signs free trade agreements with credible trading partners, Indian companies will leverage the ?national? treatment in those countries to set up operations there. This is already happening with South Korea and is likely to extend to places like Thailand and Vietnam when the India-Asean FTA comes into force. The second factor is the flexibility of deploying labour. Indian labour laws trail the statutes of most major economies and so it is a significant advantage to disassemble the domestic plant and set it up abroad, with very low customs duty to act as spoilers. The third is the hassles of acquiring land that have already reached catastrophic proportions. A dipstick survey of industry shows there is an extreme reluctance to plan any project where a parcel of land has to be bought. It is not funny that in the last three years, even public sector NTPC has slipped up on its power production plans, able to add only a third of its 9,220 mw planned for this period.
So is it too early to raise an alarm? The numbers could reverse as the busy season gets sharper. But as of now, there seem to be very few countervailing thoughts to reverse a developing problem.
?subhomoy.bhattacharjee@expressindia.com
