Much to the relief of economic managers and business community, credit to private sector has started flowing again after slowing to a trickle for more than twelve months.
Although, the gross borrowing by private sector virtually remained stagnant on a month-on-month basis in September, according to the central banks latest credit disbursement data classified by borrowers, the pace of decline has slowed in tandem with the gradual pick up in manufacturing output. This is confirmed by the banks weekly release of money supply numbers, which showed that private sector borrowed whopping Rs37.3 billion in first three weeks of October.
Within the private sector, borrowings by manufacturers, especially textile makers turned positive in September after showing a month-on-month decline for the many months before - generating hopes that the economy is recovering on the back of fresh textile export orders ahead of Christmas shopping in the developed western economies.
But does this necessarily mean the economy will start gathering pace in the quarters to come? The answer to that depends on a lot of ifs.
One of the main concerns is that the present recovery is export based - historically marketed to the US and UK, and both economic engines aren running very well, and may even sputter out. Joblessness in the worlds biggest economy rose to its highest since 1983 in October, creating jitters that the much-hyped growth in the last quarter, which partly came on the back of cash-for-clunker programme, may not continue further. As for the UK, the economy hit its worst slump since 1981.
This requires greater reliance on domestic consumption and export diversification to eastern world to keep the industries running at normal pace.
Although the consumers propensity to consume increased in FY09 by 198 basis points to 77 percent, but their lesser reliance on borrowed money implies banks reluctance to lend them.
This, coupled with the 4.7 percent year-on-year decline in the first quarter direct tax collection and 13.4 percent fall in custom revenues amid just 6 percent growth in sales tax generation implies a fall in purchasing power despite proportionately greater spending at the expense of saving.
Even the broader lending structure looks weak. The central banks last banking review for the quarter ending June 2009 shows that share of loans for fixed investment remains rather stagnant - in tandem with sliding machinery imports which has allowed the country to run a positive current account balance for now.
Interestingly, the ratio of NPL-to-loan is the highest in the borrowings for fixed investment - which stood at 13.9 percent in June 2009, from 10.8 percent in September 2008. These indicators amid falling number of new listings at the bourse tend to signal that companies are less willing to invest any further just as yet.
Yet, if the agriculture continues to perform the way it has so far with bumper output in most major crops, there are hopes that the economy will manage to grow at least by 2.5 percent, and if the export orders keep pouring despite weakness in US and UK, then one can see an even better performance. Lets keep fingers crossed.
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