Positive Credit Offtake Trends Drive Investment Recovery

Though still small, there are now definite signs of some pickup in India's investment cycle. In January, we had pointed out that India's investment cycle might just be recovering. One quarter later, there are more signs that point towards this. Anticipated growth in gross fixed capital formation is expected to have accelerated in 2015-16 compared with the previous year, as per the CSO's latest numbers. Foreign Direct Investments have shown robust growth in the first three quarters of 2015-16 and are poised to have been at their highest ever for the year as a whole.

But the strongest indication of a pickup in the investment cycle is visible from the improvement seen in credit offtake. After growing at sub-10 per cent levels up to December 2015, credit growth has consistently been over 10 per cent from January 2016 onwards. Moreover, growth is also faster in the last quarter of 2015-16 compared with that during the previous year.

A look at the sector wise split-up of credit deployment strengthens the argument in favour of turnaround in the investment cycle. For one, two of three heads by economic activity: agriculture and services show positive trends. Credit to agriculture remains in double digits at 13.5 per cent for the period up to February 20, 2016, which is strong, despite a slowing in pace from the last year. Credit to services has picked up pace to 8.6 per cent, up from 6.7 per cent last year. Together the two segments account for almost 36 per cent of total credit offtake. Industry is the only segment which is still quite muted.

Even considering the personal loans segment, loans for housing, which accounts for over 53 per cent share of total personal loans, have shown not just impressive growth of 19 per cent, the growth has actually accelerated from 17.7 per cent during the previous year. Since housing loans are channelized towards asset creation, they add to the capital formation in the economy.

Despite the growing evidence pointing towards the start of a comeback in investments, there are indicators that are an area of concern as well. A case in point being the production of capital goods. At the time it was last written about, the index had grown by 9.4 per cent over the April-October 2015 period, compared to 5.3 per cent in the same period in 2014. In comparison, the growth is almost entirely wiped out by January 2016, with April 2015-January 2016 growth down to 0.2 per cent from 6.2 per cent during the corresponding period of the previous year.

The positive evidence, at this point, however, overwhelms the downturn witnessed in the capital goods segment. This indicates, that the investment cycle will more likely pickup from here on than not.