Economists raise concerns as India's growth increasingly becomes credit expansion-led

Mumbai: India’s strong economic growth is increasingly being supported by rapid credit expansion, likely raising questions about how sustainable the current pace of growth will be and whether stronger domestic demand could eventually force the Reserve Bank of India to raise interest rates, economists said.

“Credit growth is something that worries me a bit,” said Saugata Bhattacharya, external MPC member at a panel discussion during the State Bank of India conclave in Mumbai. He pointed to the sharp increase in financial-sector growth and the role of credit in supporting the economy. The key question, he said, was how much borrowing was financing working capital, how much was supporting personal consumption and how long such credit-fuelled growth could continue.

“I am pretty optimistic that growth will be sustained in the near term. But to be able to sustain this growth over a longer term in a very hostile global environment, everything will need to fall in place. Be it consumption, investment, capex, technology, talent, skills, to sustain the 6.5%-7.5% growth over the next 15 years,” Bhattacharya said.


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India’s real GDP growth accelerated to 7.8% in Q1 FY27,, above the RBI’s earlier 7% estimate. At the same time, bank credit growth accelerated to 19% year-on-year as of August 31, latest RBI data showed.

But stronger domestic demand could itself create a case for tighter monetary policy if inflation pressures broaden.

“Just because of our own domestic conditions we might have to go for a hike,” Samiran Chakraborty, chief economist, Citigroup said, pointing to the fading effect of exceptionally low inflation seen over the previous two years.

Additionally, India may face a tougher task in attracting enough foreign capital to finance its investment needs as the global environment changes, Chakraborty said.

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He noted that India has attracted an average of about $70 billion of capital annually over the past 15 years, but estimates that the country would need more than $60 billion a year over the next decade to fund the savings-investment gap.

The key question is whether India can continue attracting even that amount as global interest-rate differentials narrow and investors become more selective.

“We estimate that we need more than $60 billion annually over the next 10 years to fund the savings-investment gap. The question is whether we will be able to get even $60 billion in this changed global environment,” Chakraborty said.