By K R Sudhaman
India’s former chief economic adviser Arvind Subramaniam had flagged in his economic survey some years ago that India faced a major economic issue – twin balance sheet problem wherein Indian banks suffered huge debts as corporates, which had overleveraged banks were suffering huge losses resulting in defaults. This piquant situation occurred as the corporate sector over-expanded during boom period leaving them with obligations that they cannot pay. This resulted in surging non-performing assets of banks choking their ability to lend. This had come to be known as twin-balance sheet problem meaning the balance sheets of both banks and corporates had gone awry.
But the two years of covid gave breathing space for both banks and corporates to clean up their balance sheets on the back of the Insolvency and bankruptcy code. Now the banks NPAs have come down drastically to less than five to six per cent gross NPAs and some of the public sector banks have as low as less than one per cent net NPAs. This is in sharp contrast to huge NPAs some years ago, which were in double digits threatening viability of some of the banks. Many of the corporates, which had excess capacity earlier, have now started investing with demand picking up. Some of them had capacity utilisation as high as 80 per cent. This is a welcome development and augured well for the economy going forward. For the first time in many years health of Indian banks are looking good.
With revival of the economy after Covid, bank credit has started growing steadily this financial year. According to Reserve Bank of India, bank credit grew almost 17 per cent in the fortnight ending November 18, 2022. The data showed that bank credit grew to 133.29 lakh crore for fortnight to Nov 18, from 113.96 lakh crore on Nov 19 2021. But the deposit growth came at 9.30 per cent with the overall base at 177.15 lakh crore as on November 18, 2022. With huge pick up in credit growth, banks have aggressively started deposit mobilisation efforts to meet the growing demand for credit. In the financial year 2021-22, bank credit rose merely 8.59 per cent and deposits by 8.94 per cent. According to Boston Consulting Group, banks in India have come out stronger post the Covid-19 pandemic and are now firmly on the path of growth. Banking sector reported record profitability, robust credit growth and significant improvement in credit quality. Besides, the public digital platforms will further spur growth in lending with lower processing and acquisition costs.
Lately there have been several positive reports about revival of private capital expenditure. The chief economic adviser V Anantha Nageswaran has said that private capital expenditure in the first half of this financial year has crossed Rs three lakh crore and that the number could exceed Rs 6 lakh crore by the end of this financial year. This is also evident from the fact that top corporates are doing well in the stock market, there is general revival of real estate sector across the major cities and several companies have already announced fresh projects involving sizeable investments. It is quite obvious that there is revival of investment cycle in the private sector. These are positive signs but one has keep the fingers crossed as revival has not yet become across all sectors and global economic scenario not that bright to pump-prime exports.
Last year companies had reduced their borrowings significantly helping the process of cleaning their balance sheets. Now with the revival of demand and improved capacity utilisation, there is appetite for more investments, which is getting reflected through higher credit growth. All this point to kick-starting of capital expenditure cycle this financial year. But in the first half of this financial year a handful of companies accounted for bulk of the spending. For the cycle to gain momentum, more companies would have to start investing. Both central and state governments could incentivise companies to go for capital expenditure through supportive monetary and fiscal policies. This is important as top 22 companies accounted for 71 per cent of the private capital expenditure during April-September this financial year. The private capital expenditure had dropped to Rs 4.74 lakh crore in financial year 2021 as against Rs 8.19 lakh crore in the financial year 2020. The first half of this financial year has seen some revival but it is not visible across industries. Also it may take some time get back to pre-covid levels of private capital expenditure.
One area that requires specific attention is revival of MSME sector. It would be worthwhile for government to consider some package in the budget to handhold this sector which accounted for 45 per cent of India’s manufacturing and nearly 40 per cent of goods exports. One area that requires attention is lending to this sector for capital expenditure. An alternative has not yet emerged to informal lending that got killed after demonetisation. The MSMEs largely depended on informal lending for investments in the past. Government could look at setting up an institution for this purpose. Expanding PLI scheme to more sectors would be welcome. A sizeable number of manufacturing companies have seen a decline in their fixed assets because of some near term difficulties and it would be worthwhile for government to consider some special package to enable these companies to get back on the rails.
There appeared to be signs of revival but government will have to press on the accelerator to ensure it is sustained. (IPA Service)