One definitive way of confirming the growing suspicion that the economy is slowing is to view in perspective the policy stance adopted at various times. Key economic indicators, in addition to business sentiment in sectors such as automobiles, cement and steel, point to a much lower growth trajectory than had been visualised barely six months ago. Against this backdrop the views that would otherwise seem routine advisories acquire a deeper significance.
A few days ago Mr Pranab Mukherjee warned banks to remain on the lookout for the “asset quality” of their portfolios; such advice is routine, as is the accompanying homily about not being too “risk-averse”. But the advisory comes on the heels of a general swing in outlook as various stakeholders come to grips with rising interest rates on the heels of stubborn inflation. The RBI's war on inflation through monetary tightening seems to have paid dividends, ironically in a slide in demand across both investment and consumption aggregates. Growth has been pegged lower, at around 7.7 per cent, but who can confidently forecast just how far the downswing in sentiment will go or when it will bottom out? We have just seen the first quarter give us fair warning and the second and third quarters, adjusting for the festive season's demand spurt, may bear testimony to a downtrend. Who knows? But one thing is clear right now: while bank deposits are healthy on account of an increase in rates across tenures, credit in the fortnight ending August has dipped, probably owing to high lending rates. Annualised credit growth rate remains positive, at around 20 per cent. The problem is that level of growth was largely fuelled by core sector lending; over the past two years lending to the power sector expanded more than 45 per cent. In light of the current fears of deceleration, that robustness could prove costly for banks, just as their lending to small and medium enterprises raises the spectre of a dip in “asset quality”. The RBI warned banks to watch out for such eventualities a few days before North Block echoed the advisory. But power projects, subject to the losses of State electricity boards, may have no control over their immediate future. Whatever the outcome, one thing is clear from the advisories: caution will spread and when banks get cagey about lending to a clientele already reluctant, the economy will run out of more steam than it has so far.