Since FY20, banks are giving more personal loans than loans to the industry, particularly to large industry, and the growth in personal loans is even more dramatic.

Finance Minister Nirmala Sitharaman is disheartened that the industry is not investing in manufacturing, despite the corporate tax cut of September 2019 and the production-linked incentive (PLI) introduced in February 2021. She went on to compare them with ‘Hanuman’, the monkey god, who was reminded of his forgotten power and coaxed to fly overseas to look for the abducted Sita. He did and found her in Ravan’s Lanka.

That may seem far more outlandish in the present context.

Had the minister done her homework (and she has much more information at her disposal than a lay person) she would have been forewarned about the lack of fresh investments long ago – even before the pandemic struck and Russia went to war with Ukraine, thereby pushing the world into the brink of a severe recession.

Here is one glaring warning signal.

Personal loans outstrip credit outflow to industry

Credit flows from banks – a standard proxy for investment in the economy – inverted beginning with FY20.

Normally, one would expect credit offtake of “large industry” (within the “industry” segment) to be far higher than personal loans sought by individuals to buy consumer durables, houses, vehicles or fund education etc. But that is not the case anymore. Worse, the RBI data shows credit inversion is now well entrenched.

In FY20, credit offtake by large industry, capable of investing significantly in manufacturing or other industrial activities, fell below personal loans for the first time since FY08 (since when the RBI data is available). Compared to Rs 24.2 lakh crore of credit to large industry, personal loans jumped to Rs 25.5 lakh crore – a gap of Rs 1.4 lakh crore. The gap widened to Rs 6.5 lakh crore in FY21 and then to Rs 9.8 lakh crore in FY22. The trend continues in FY23. In June 2022 (up to which data is available), the gap went up to Rs 11.3 lakh crore.

This is true for the industry as a whole too.

In FY21, credit offtake of industry was Rs 0.76 lakh crore less than personal loans and in FY22, it was Rs 2.33 lakh crore. In June 2022 (part of FY23), the gap increased to Rs 3.5 lakh crore.

There is yet another facet to it which should have alerted Sitharaman years earlier.

In terms of growth, in FY09, bank credit to large industry and industry were 24.1% and 22.8%, respectively, while personal loans grew at 7.8%. In FY14, their respective growth numbers had partly flipped and stood at 12.3%, 12.8% and 12.5%. In FY15, credit growth to large industry and industry fell to single digit (5.3% and 5.6%, respectively) while personal loans grew by 15.5% – completing the process of flip.

In FY21, growth in personal loans stood at 17.8% – far higher than credit outflow to large industry and industry, which dropped to -2.4% and 0.9%, respectively. In FY22, the numbers stood at 12.6% for personal loans as against 1.9% for large industry and 7.5% for industry. In June 2022, the trend remained intact, except credit growth to large industry fell to -0.1%.

What these data show is that large industry is virtually grounded for long (in terms of fresh investment), while personal loans segment is flying high and boosting credit growth of banks. Personal loans are meant for consumption expenditure and as such, they do help in production of goods and services but when credit to industry, particularly large industry, remains muted, there is not much hope for manufacturing, or ‘Make in India’, to fly. Let us not forget, industry is largely credit-driven and equity infusion by proprietors is very low even for the richest industrial house in India (Adani Group) – as the CreditSights reported last month.

Had the finance minister been alive to ground realities, she would have learnt many facts – the disastrous demonetization of 2016 and the botched GST of 2017 that began the economic slowdown and dried up the need for fresh investment; the untimely and unplanned lockdown that triggered a massive distress migration and led to further loss of millions of jobs and small businesses overnight etc. It is the demand-side problems that need fixing (like direct cash support to impoverished individuals, households and small businesses and proactively creating more jobs through fiscal policies to create more demand in the economy), rather than relying primarily on supply-side solutions (like cheap credit, corporate tax cuts and PLIs) for automatic growth, investments and jobs.

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