A Puzzling Industrial Credit–Growth Disconnect in FY17–FY19

Context:

• During FY2017–FY2019, industrial credit growth declined sharply despite stable industrial GDP growth.

• This unusual divergence has raised concerns regarding GDP measurement accuracy, financial deepening, and structural shifts in bank lending patterns.

• The issue assumes significance in light of India’s manufacturing-led growth narrative and bank-based financial system.

Key Highlights:

Trend in Industrial Credit:

• Share of industrial credit in total bank credit declined from 42% (2013) to 23% (2024).

• CAGR of industrial credit during 2014–2024 stood at only 4.1%, far lower than previous decades.

• Even after excluding post-COVID years, the weak growth trend persists, indicating structural factors rather than cyclical shocks.

Regional Credit Distribution:

• Western, Southern, and Northern India — traditionally industrialized regions — recorded below-national-average industrial credit growth.

• Central and Northeastern regions showed higher growth, largely due to their smaller base of industrial credit, not genuine industrial expansion.

GDP–Credit Divergence:

• A clear decoupling between industrial GDP growth and GVA-ASI (formal manufacturing output) was observed during 2016–17 to 2018–19.

• Historically, industrial credit growth and ASI-GVA growth showed strong correlation (0.82 during 2004–2020), making this period an anomaly.

Financial Deepening Concerns:

• Bank credit-to-GDP ratio has stagnated at 50–55% since early 2010s, unlike Japan and China, where ratios are significantly higher.

• Credit expansion has increasingly favoured the services sector and personal loans, not productive industrial investment.

Credibility of GDP Estimates:

• The divergence suggests a possible overestimation of industrial GDP under the 2011–12 NAS series.

• The IMF’s downgrading of India’s GDP data quality to ‘C’ status reinforces the need for closer scrutiny.

Relevant Prelims Points:

• Industrial Credit: Bank lending to industries for capital expenditure, working capital, and expansion.

• GVA-ASI: Measures value added by the formal manufacturing sector using Annual Survey of Industries data.

• Issue: Sharp fall in industrial credit growth despite stable GDP.

• Causes:

  • Shift in bank lending towards personal and services loans

  • Risk aversion post-NPA crisis

  • Possible statistical overestimation of industrial GDP

• Impact:

  • Weak industrial investment

  • Slower manufacturing capacity expansion

  • Stagnation in financial deepening

Relevant Mains Points:

• Facts & Definitions:

  • NAS (National Accounts Statistics): Framework for measuring GDP and sectoral output.

  • ASI: Captures formal manufacturing performance, unlike GDP estimates that include informal sector assumptions.

• Conceptual Clarity:

  • Sustainable growth requires alignment between real output growth and credit expansion.

  • Persistent divergence signals measurement issues or structural inefficiencies.

• Concerns:

  • Misallocation of credit away from productive sectors

  • Policy misdirection due to inaccurate GDP signals

• Way Forward:

  • Strengthen GDP estimation methodology, especially informal sector proxies

  • Encourage long-term industrial lending through development finance institutions

  • Improve credit risk assessment for MSMEs and manufacturing

  • Promote financial deepening aligned with real sector growth

UPSC Relevance (GS-wise):

• GS 3: Indian Economy, Industrial Growth, Banking & Financial Sector, Data Credibility