Andy Mukherjee: India's economy needs a revival of ‘animal spirits’, not cheaper credit

The data doesn’t show any evidence of that. Nor does the response of authorities inspire confidence. When it comes to large long-gestation projects, a handful of tycoons will do the heavy-lifting, and it will take more than cheaper borrowing costs to sway their decisions.

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The private sector’s capacity-expansion intentions have fallen to a three-year low. Banks’ exposure to industries that used to be some of their biggest borrowers— roads, power, telecommunications, ports, airports, construction, property builders—is down to 11% of their loan book, half what it was a decade ago.

Sanjay Malhotra, the new Reserve Bank of India governor, has thrown the kitchen sink at what is basically a problem of comatose animal spirits. Within six months of his appointment, he slashed the benchmark interest rate by 1 percentage point to 5.5% and flooded the banking system with liquidity. He also eased norms for small individual borrowers that rely on microcredit, or loans against gold jewellery.

All this will have an indirect effect at best. The real-estate industry may gain as lower mortgage costs entice homebuyers. But a broader investment-led credit cycle continues to elude India. Which is why RBI has now mandated that banks set aside 1% to 1.25% of their loans to unfinished projects to offset any losses. The requirement drops to 0.4% to 1% when assets start generating cash. These norms are more relaxed than last year’s draft guidelines.

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But how will funds flow into projects that create new assets when the bottleneck is not in the supply of credit but demand? In October, S&P had predicted an $800 billion tsunami of investment by Indian conglomerates over 10 years, about 40% in new areas like green hydrogen, clean energy, aviation, semiconductors, electric vehicles and data centres. Add the infrastructure needed to sustain these industries, and it would automatically mean a whole lot of new projects, and demand for bank financing tied to future cash flows.

But for that, the country’s tycoons need to be confident. 

Among local billionaires, Gautam Adani may still be on track to binge on capital expenditure, despite a US Justice Department indictment. His group would invest $15 billion to $20 billion annually over the next five years, he announced at a shareholders’ meeting this week. 

Rival conglomerates, however, are distracted. Mukesh Ambani has to steady his empire first—and spin off retail and digital services in public markets to unlock value in Reliance. The 157-year-old Tata Group has to sort out a mess at Air India, the struggling airline at the centre of the country’s worst passenger jet crash in nearly three decades. Billionaire Sajjan Jindal is embroiled in knotty legal proceedings. The Supreme Court in New Delhi has annulled his JSW Steel purchase of a bankrupt company—four years after he paid creditors $2.7 billion to acquire the unit that’s now 13% of his steel revenue. 

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So much for the four pillars of the national team. The appetite for credit is subdued even among smaller companies. They are still scarred by the bad-loan crisis that erupted a decade ago. 

The post-pandemic surge in the revenue of engineering and construction firms—a proxy for new asset creation—has ebbed. This fiscal year’s government target for new roads is the smallest since 2018, according to India Ratings. Slow-moving irrigation and drinking-water projects are locking up working capital, while margins are getting squeezed in the construction of factories and buildings. Contractors are, therefore, cautious about borrowing.

Then there are heightened global uncertainties. Like their peers elsewhere, business executives are waiting for 9 July, when the Trump administration’s pause on reciprocal tariffs will end. If Washington and New Delhi are able to pull off a trade deal ahead of that deadline, Indian exports may avoid a 26% tax in their biggest market. That is when bankers in Mumbai could finally start getting calls for higher working-capital funding limits and new term loans. 

Until then, private credit will rule. Global asset managers, sovereign wealth funds, insurers and banks have actively been chasing Indian business owners who are looking either to refinance existing loans, pay for acquisitions or preserve their control. What the economy needs, however, is credit that helps create new assets. There’s little sign yet of such a virtuous cycle getting started.  ©Bloomberg

The author is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.