The Growth, Credit and Jobs Nexus

Jobs Nexus

With all the discussions about growth slowing down, it is perhaps important to take stock of a few key data points to understand state of the economy and the challenges facing is. While this isn’t an exhaustive list, it is an attempt to look at some of the major data points and understand its impact and implications. Here the focus is specifically on growth of the economy, credit and jobs.

Growth Decline
Growth rate has declined for six consecutive quarters to hit a three-year low at 5.7 percent in the June quarter. There are differences in sectoral growth rates as well. The industrial growth rate is at a five-year low. Manufacturing and construction grew at 1.17 per cent and 2 percent respectively during April to June 2017. It is important to note that manufacturing and construction together form 82-85 percent of industry.

This is definitely a cause for concern. Research has shown that for a 1 percent increase in GDP per capita, poverty is reduced by 0.78 percent. Taking the number of people below the poverty line as 270 million (a figure which is controversial, but a rough estimate is needed nevertheless), that is roughly 2 million people being pulled out of poverty. This is a significant number. That is 20 lakh lives. Growth is a major challenge.

Credit Growth and NPA
Credit creation has been slowing down in the economy. Non-food bank credit growth of banks decelerated to 5.3 percent in July compared to 8.3 percent during the same period last year. Credit growth to agriculture and allied activities fell to 6.8 percent in July compared to 13.4 percent last July. Personal loans grew by 15 percent, slightly lower than the 18.8 percent last year. Loans to industry contracted by 0.3 percent as opposed to an increase of 0.6 per cent last year.

Credit is what keeps the economy going and enables it to grow. A slowdown in credit has a serious impact on growth.

One of the factors leading to the credit growth slowdown is the huge amount of NPAs weighing down the banks. NPAs simply keep rising every quarter. While there is action on the recognition front, the resolution is still a slow process. The speed with which this should have been addressed and the pace at which it is being addressed are divergent.

But there also is another trend. As banks start shifting their focus from business to retail lending, there is another risk emerging. “All bad loans are made in good times”. When the corporates were in trouble the focus shifted to retail lending. Now retail lending is also showing signs of stress. Many cab drivers from OLA and Uber who took on debt and purchased cars are struggling to make ends meet and repay loans as the payment structure changed. Similarly, other retail segments have their own pressures. Some banks have slowly started reducing retail loans as well, but on the whole, banks have been increasing retail lending. It would be dangerous if we were to reach a situation where the banks have to deal with large corporate NPAs as well as retail NPAs at the same time.

 Job creation
According to the labor ministry, nearly 1 million youth join the workforce every month in the country. With the slowdown in growth, there aren’t enough jobs being created. Labor intensive sectors are witnessing a slowdown in growth themselves. There is a need to address this issue otherwise this could increase the political instability in the country.

All these three issues are interlinked and causality flows in all directions. Beyond a certain point, they start creating a perverse feedback loop. A slowdown in growth with a slowdown in specific sectors is slowing down the credit flow to that sector. A slowdown in credit to those sectors is also slowing the sectors down. As banks step up retail lending with limited job creation and a slowdown in growth, this could impact their portfolio health. As incomes are impacted, this puts pressure on the ability to repay. This further will create stress in the retail portfolio as NPA start to rise.

While certain key parameters such as tractor sales and two-wheeler sales are increasing, they aren’t a sign of positive growth, rather a sign postponed consumption that wasn’t possible due to uncertainty and disruption caused by demonetization and GST. However, this may not last long.

It is important to end this perverse feedback loop before things get out of hand.

-Contributed by Bhargav Dhakappa

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