Syllabus: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Role of Banking Sector
- The banking system channels household savings to industries, supporting investment, production, and employment.
- Historically, industrial credit growth and industrial output have moved closely together.
Fact 1: Declining Share of Industrial Credit
- Industrial credit share in total bank credit declined from 42% in 2013 to 23% in 2024.
- This fall is unprecedented in the last fifty years of Indian banking history.
- Credit diversion towards services and personal loans reduced industrial sector access.
- Personal loans recently surpassed industrial credit in total credit composition.
Fact 2: Prolonged Weak Credit Growth
- Nominal industrial credit grew at only 4.1% CAGR during 2014–24.
- Earlier decades recorded much higher growth: 16% (1974–90), 14% (1990–2004), 23% (2004–14).
- Excluding pandemic years, 2014–19 growth remained equally low at 4.1%.
- Indicates a structural slowdown rather than a cyclical shock.
Fact 3: Regional and Sectoral Trends
- Industrially advanced regions such as western, southern, and northern India showed below-average credit growth.
- Higher growth in central and northeastern regions reflects their lower initial credit base.
- Across industry groups, no sector achieved double-digit credit growth during 2014–24.
- This contrasts sharply with uniform double-digit growth during 2004–14.
Fact 4: Stagnation in Financial Deepening
- Bank credit-to-GDP ratio rose sharply in late 1990s and early 2010s.
- Since then, it stagnated around 50%–55% of GDP.
- Compared globally, India lags countries like China, Japan, Brazil, and South Africa.
The Core Puzzle: FY17–FY19 Decoupling
- Historically, industrial credit and ASI-GVA growth show strong correlation.
- Long-term correlation reached 0.82 during 2004–2020.
- Between 2016–17 and 2018–19, industrial credit and ASI-GVA declined, but industrial GDP remained flat.
- This anomaly suggests possible overestimation of industrial GDP in the current NAS (2011–12) series.
- IMF’s downgrade of India’s GDP estimates to ‘C’ status reinforces concerns.
Conclusion
- The persistent slowdown in industrial credit and the FY17–FY19 decoupling require deeper investigation.
- Accurate GDP measurement and revival of industrial credit are essential for sustainable industrial growth.