The gridlock is more than a fiscal crunch

By S. Swaminathan

It is the run-up to the Union Budget and therefore it is the time when all the economists focus on the fiscal deficit as the major national malaise. The perception that the continuing mismatch between Government expenditure and revenue is what causes the pressure on the real interest rate in the system is logical. Even the lull in investment activity (deriving mostly from laxity of demand) has much to do with the fact that money costs in the Indian economy rule at prohibitive levels when compared to developing countries in the Asian region leave alone the industrialised countries.

Macro-micro contradictions

National Income data, available for 1998-99, suggest that gross domestic savings, as a percentage of GDP, have come down from a peak of 25.5 per cent in 1995-96 to a low of 22.3 per cent in 1998-99. Gross domestic capital formation has consequently come down from 27.2 per cent of the GDP in 1995-96 to 23.4 per cent in 1998-99. It is noteworthy that the contribution flowing in the form of overall foreign investments (both portfolio and FDI funds) has contracted from 1.7 per cent of the GDP in 1995-96 to 1.1 per cent in 1998-99. It is quite likely that the savings rate could have marginally risen in 1999-2000 given the assessment that the overall consumption expenditure in the economy has suffered a slippage. That this is no cause for comfort has been proved by the fact that during the current year, in quite a few segments in industry, demand resistance has proved a stumbling block to active capacity utilisation.

As contrasted with the macro-economic situation in which savings (as of 1998-99) had shown a decline, at sectoral levels, another kind of imbalance between availability of funds in the financial system and access to such funds by potential users (agriculture, small industry, medium and large business corporates in all but the ``click'' sector) seems to have emerged although the data available with reference to the financial sector are not all that conclusive about the trend.

Banks flush with funds?

A simple comparison as between the accretion to aggregate deposits of scheduled commercial banks and the increase in total bank credit, for a given period, would serve as a yardstick for measuring the availability - access divide. Taking end-October 2000 as the reference period, aggregate deposits had grown by Rs. 116,109 crores or by about 15 per cent on a year-to-year basis. The increase in total bank credit, during the same period, was of the order of Rs. 87,013 crores or by about 22 per cent. While the percentage increase is impressive, the fact is that the increase in total bank credit represented only about 75 per cent of the increase in aggregate deposits. Then again, if non-food credit alone is taken into account, the increase was only by Rs. 74,591 crores, which represented about 65 per cent of the increase in aggregate deposits. And if ``loans'' only are taken into consideration, leaving out ``Inland bills purchased and discounted'' and ``Foreign bills purchased and discounted'', the increase, on a year-to-year basis, was of the order of only Rs. 65,296 crores - about 56 per cent of the increase in aggregate deposits.

The increase in investments in government securities during the year ended October 2000, has been rather modest when compared to the past. The increase was Rs. 46,729 crores - about 40 per cent of the total rise in aggregate deposits. For 1999-2000, the increase in investments in government securities had been of the order of around 56 per cent.

Another way of looking at the credit trends is to focus on the credit-deposit ratio of scheduled commercial banks. As at the end of October 2000, the ratio was around 54 per cent. The comparable figures for March 31, 2000 and March 31, 1999, were respectively 57.1 per cent and 54.8 per cent. That there is enough indication of a slippage during the current year need not be overstressed.

Sectoral deployment of bank credit

The complex environment surrounding bank lending with all the negative soundings on non-performing assets and the pervasive inhibitions bred by a ``vigilance culture'', has harmed the economy already even though the connection between a demotivated, inefficient bank credit system and the syndrome of sickness, particularly in the small-scale sector, is difficult to establish.

Nevertheless, the data relating to sectoral deployment of bank credit (according to RBI Report on Trend and Progress of Banking in India 1999-2000) are indeed revealing. Priority sector lending during 1999-2000 came down to 32.2 per cent of gross bank credit from 33.6 per cent a year earlier, credit to agriculture 10.7 per cent from 11.4 per cent and credit to small industries to 12.5 per cent from 13.9 per cent.

Credit to industry (medium and large) also came down to 36.6 per cent of total credit to 36.2 per cent. Even apart from the question of bank credit not rising to meet the needs of industry, there seemed to be a distinct preference for lending to the relatively larger corporate clients and an implied unwillingness to entertain loan proposals from smaller companies and proprietary undertakings. Given the managerial priority for recovery of loans over prospecting new borrowers, banks seem clearly heading for a situation where innovative schemes of lending will become all too rare if they do not become ``taboo''.

Impasse in capital market

According to data published by the Centre for Monitoring Indian Economy (Monthly Review of the Indian Economy, December 2000), capital issues during the first half of 2000-01 were at Rs. 4,360 crores - a big increase from Rs. 170 crores during the corresponding period last year.

The number of projects for which funds have been mobilised from the primary market during April-September this year is 70 whereas it was only 10 last year during the corresponding period.

But the complaint in industry circles is that new industrial ventures and greenfield projects have no way of sourcing equity funds. More specifically, the capital market seems to have moved away from ``the brick and mortar'' companies.

Is this a mirror-reflection of the growing divide between the new and the old economies or a needless aberration which calls for determined correction particularly by the financial institutions?

On the face of it, the ``sanctions and disbursements'' record of the IDBI, ICICI and IFCI during the current year, seems to be heartening, with total sanctions during April-August 2000 registering an increase of 21 per cent and total disbursements spurting by 34.1 per cent. (The corresponding figures for April- August 1999 were 7.2 per cent and 6.2 per cent respectively).

Disaggregated data would, however, be needed to examine the question whether the beneficiaries of the loans provided by these institutions were mostly the larger companies in the old economy with the new-found zeal for ``mergers and acquisitions'' (M&As) or those venturing in the ``knowledge industries''.

Among the financial institutions, again, ICICI leads with disbursement of Rs. 11,975 crores with IDBI notching up only Rs. 4,876 crores and IFCI trailing with Rs. 622 crores during April- August 2000.

The overall picture of capital market intermediation does not inspire much confidence that the pursuit of a 9 per cent GDP growth rate in the medium term will be enormously facilitated by the domestic market.

Policymakers cannot afford to take the market for granted. Nor can the Finance Minister treat this subject as being largely extraneous to the Budget.

How can Mr. Yashwant Sinha craft a growth-oriented, forward- looking Budget without a major thrust to debottleneck the financial sector?

Send this article to Friends by E-Mail

Section  : Business
Previous : Compulsory tea auction scrapped
Next     : HP's one-stop solution for customers