GOVT. TOEING THE LINE OF INDUSTRIALISTS- RBI INFUSES SURFEIT OF FUNDS FOR INDUSTRY – AGRICULTURISTS STARVED of CREDIT - ONLY 1/3rd of AGRI LOAN TARGET MET
. Prime Minister meets industrialists and assures them that the government would take necessary monetary and fiscal steps to boost economic growth and more credit at reduced rates. All Public Sector Banks, immediately after meeting FM, announce reduction in interest rates by 75 basis points. Thus the second demand made by the industrialists to slash interest rates is fulfilled. The first demand of release of funds is more than fulfilled by the RBI by pumping in Rs 280,000 crore, approximately equivalent to 7 per cent of banks’ deposit liabilities. Thus attempt to arm twist Government by ASSOCHAM, raising the bogey of 25% layoff of jobs, has succeeded as more than necessary funds are released even with poor industrial growth rate which is only half of previous year despite increase in industrial credit to 45% from 40%. The situation has been one of over-extension of credit relative to the resources of the banking system. The year-on-year incremental credit-deposit ratio is a staggering 96 per cent. No wonder the banks have no resources to lend. After three years of unbridled 30 per cent per annum credit expansion, there is bound to be a slowdown. Rather than suddenly pumping in over Rs 280,000 crore of liquidity into the system within a few weeks, it would have been preferable to stager the release. Injecting large doses of liquidity would only result in hyper inflation with in a year.
ii. Agri credit only one third of target amount of Rs 2,80,000 crore-No hope of reaching target
(Source: Business Line 06-11-08)
While industry was slurping with surfeit of funds, agriculture is starving of credit. In the first half year, credit of only Rs 95,064. Crore was extended to the farm sector. This is lower than the Rs 101,022 crore given over the corresponding six months period of 2007-08. The current year’s target is Rs. 2,80,000 crore. The decline in disbursals over the first half of the current fiscal is indicative that the year may end far short of the target figure. The fact that just 22 per cent of farmers had access to formal bank credit, and 27 per cent had to depend on moneylender while 51 per cent could do neither, is proof of failure of the policy of lending to Agriculture 18% of net bank credit. Agri credit was never extended up to the mandated level of 18% of net bank credit, the figure did not exceed 10% to 14% band since 1990s, that too taking into account 30% of it being given as indirect finance. The present slowdown, more than ever before, highlights the need for investments in farming and farm related industries. The FAO report has also highlighted long-term challenges facing global agriculture such as land and water constraints, low investment in rural infrastructure and agricultural research, expensive agricultural inputs in relation to farmgate prices.
iii. CREDIT CRUNCH or CREDIT SURFEIT!
Where is the credit crunch? Up to October 2008 this fiscal, total credit grew by a whopping sum of Rs.2,53,000 crore (10.7%) compared to a small growth of Rs 95,500(4.9%) crore during comparable period last year. Investments grew only by 8% during this period compared to a high of 20% during comparable period last year, yet investment/deposit ratio is 30% as against required 24% which means excess liquidity is diverted for investments instead of for loaning. Credit deposit ratio increased to 75% from 70% during the same period. On Y-o-Y basis, credit to industry, which provides employment for less than 20% of work force and contributing just about 25% to the GDP, grew by 45% (Rs 2,18,200 crore) by Aug 08 compared to industrial credit growth of 40% (Rs.1,43,600 crore ) during the previous year. Growth in industry GDP, however, plummeted to 5% from 10%. Agriculture, providing employment to 60% of the work force and a GDP share of 20%, witnessed declining share in incremental credit to 8% from 13% during the same period last year. The mandated credit to agriculture is 18%.The amount that should have been given to agriculture is thus diverted to industries. In October 08,obliging Industrial captains on their demands to increase credit flow to industry, RBI released funds available for banks with a whopping sum of Rs2,80,000 crore. So the question to be answered is not why there is credit crunch - but why industry absorbed double the credit while their performance halved? Industrialists are claiming with out basis that there is credit crunch while in fact there has been credit surfeit to industry. Let them now crank their machines and perform to reach at least last year level of industrial GDP growth instead of crying wolf and drawing a red herring to divert countries attention from the real issue of their non performance despite credit surfeit. Let RBI and government find out what industry did with all the credit absorbed by them with out increasing industrial out put.
iv. MASTER STROKE
So what did industrialists gain from their meeting with the prime minister? Unlimited credit flow even after 45% growth in credit to industry despite there being lesser Industrial growth. And cut in bank interest rates at the cost of depositors as inflation is still double digit and bank deposit rates are reduced now. P.M gained nothing worth while as there is really no real threat of layoffs. Industrialists went from the meeting to draw money from banks that too at reduced interest rates laughing all the way. So whose master stroke it is?
