It's a favorable change of season for Indian equity markets... from almost a hopeless scenario to Sensex touching new highs. Much of this turn in sentiments can be attributed to the confidence Modi Government has instilled in people. People expect reforms, development and a turn around in the Indian economy now.
But has anything really changed on the ground level? Some of the key economic indicators do not suggest so. As highlighted by The Hindu Business Line, banking credit growth of 10.9% has hit the lowest level in last five years; lower than even the worst phases in the Indian economy. The sector itself has been a victim of the prolonged slow down in the Indian economy. During the slowdown, investment activity by companies has taken a back seat. Lot of projects are still stalled due to the issues like lack of clarity on policies, land availability, power and labour issues. Unless strong action is taken regarding these aspects, new projects are unlikely to be undertaken, leaving less hope for revival in the credit growth rate.
And it's not just the lack of demand that is in play here. The increase in bad assets in the banking sector and focus on better risk management has made banks wary of extending loans. High inflation is another reason why credit growth is likely to remain low. Unless inflation levels in the economy come down, interest rates are unlikely to be lowered, thus impeding the growth rate in credit offtake.
In such scenario, can we really claim that an economic recovery is in sight? We don't think so. Unless Government takes some tangible and quick actions. to revive the investment cycle! And while there is a lot of optimism in this regard, the actions seem to be lagging far behind.