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.
To get a sense of the drop in magnitude, the absolute numbers are better. Incremental growth of non-food credit from banks has been only Rs 3,24,887 crore till September 25 of which the credit to commercial sector is just about Rs 94,000 crore. The sum is actually less than that of last year at the same point by Rs 1,91,417 crore. If the industry has to grow at even the same pace as last year, the current sum is inadequate.
But given the current trends, even if rate of growth of credit picks up sharply (highly unlikely) in the rest of the year, the rate of growth of bank credit is still going to be nowhere near the rate of 23% for last year.
Then what are the alternative sources from where industry is financing its credit needs. One extremely plausible explanation could be the mutual funds. In September itself, redemptions from the liquid and the money market funds by companies and some banks was Rs 1,44,000 crore. Companies typically park their short term surplus capital in such funds, and use them in the course of the year. After a period of frenzied building up of surplus, since October-November last year, that is now being offloaded. The sum is significant; more than 5% of the gross outstanding bank credit at the end of September. If the figure is matched against the total outstanding bank credit to industry as per RBI figure for end-March 2009, it is far higher at almost 14%.
The other source through which the industry is financing itself is the accommodation that commercial banks provide in the form of investments in shares, debentures, bonds and most importantly through commercial paper. That sum is also close to Rs 1,00,000 crore.
The final piece of financing is of course refunds from the income tax department. Figures released by the Central Board of Direct Taxes show the total tax refund has shot up by 50% as on September end from last year at Rs 28,000 crore.
Taken in all, this means the bulk of the financing for the corporate sector is now originating from non-banking sources. This is a very unusual state of affairs for an economy the size of India. Of course, even on a historical basis the total credit from the banking sector to industry is less than 30 % of the GDP even in March 2009.
But the current developments show that even this is unlikely to hold. That could have been a cause for concern but it is not so. This is because as the data shows the agents taking the lead in financing industry are rapidly changing. Instead of banks, mutual funds are moving to centre stage. This is of course data culled from a half year that has just recovered from a major upset in the financial market. But if the trend holds we are in for a sea change in the shape of the financial sector?the implications are something that will need to be studied far more. But a game changer definitely.
?subhomoy.bhattacharjee@expressindia.com