Revival in capex likely to push overall credit growth to over 15% in FY24: Study

A Crisil study finds that a full-fledged revival in capital expenditure in the coming fiscal will push overall credit growth to over 15% in FY2024. This is reassuring, but demand must be buoyant for a full-fledged capex revival. RBI data showed that as on October 21, bank credit grew 17.9% year-on-year. The study expects growth to moderate somewhat in the second half. Private investment will pick up when there is visibility in profits over the near-to-medium term. Thankfully, corporate balance sheets are deleveraged (as companies paid off costly debt when interest rates were low) and public sector banks have cleaned up their books, enabling them to lend afresh. RBI has said that the growth in bank credit for working capital in the recent months reflects an optimistic outlook for demand conditions. Credit growth has been driven by retail (home loans and unsecured loans) and the MSME segment, rather than corporate credit.

A pick-up in credit demand in sectors such as infrastructure and renewable power should result in investments by steel and aluminium companies. But sectors such as fast-moving consumer goods have not shown traction, indicating that recovery is not broad-based. Private investment is tepid. The government capex, as at end-September, was 45.7% of the budget estimate, against 41.4% in the comparable period last year. Its finances, however, are stretched.

Of course, the share of gross fixed capital formation in GDP rose to 34.7% from 32.8% in the same period a year ago. This has to improve further for the economy to grow, underscoring the need for the government to speed up the pace of project execution. RBI should resist a steep hike in the policy rate as it will stifle private investment, and dampen credit demand.