Foundation Of Productive Economic Activity

Glorious milestone statistics being achieved by the markets is good news. Let us not forget that standalone numbers (market index) do no good and long-term investors use ratios for investment decisions instead!

Our markets have not just risen due to the inherent belief in future valuations, but also thanks to the surplus liquidity in the system that has not seen much lending to real-economy sectors. And that is the missed story, which needs working upon.

According to a RBI observation, loans to corporates and individuals had dried up for the past many months. That the (low) interest rate has not been the key driver for credit offtake is evident now. Of late, the retail lending (personal loans, vehicle loans, etc) has started picking up. Also it would be worth noting that IPO investment lending has also been on the rise, despite RBI cap on the quantum per retail investor. It would be worth an assessment how much of it has contributed to new investors entering the market and existing ones staying in. The Pre-Covid lending velocity of around 11% of the overall credit growth has slowed to a trickle. Banks strengthening their balance sheets by cleansing asset quality are naturally being choosy about the new assets they underwrite.

While retail lending is slowly improving, offtake from corporates and the industrial sector is stagnant. Bond markets, which are offering better rates, are seeing takers now. But most of the non-banking lending institutions are still struggling to raise debt. Bond markets have allowed those with stable balance sheets, especially large borrowers from industrial segments, to secure better rates. Hopefully this could be the start of strengthening and building up our bond markets, which have been shallow for too long.

The lack of credit lending or credit offtake could directly impact demand and economic growth. With rapid Covid vaccination that’s been driven across the country, there is a sense of optimism that we shall overcome the economic storm blowing since some time now.

The bullishness around digital startups’ rush to their IPOs is another aspect of the market’s euphoria. But we also need to understand that many of those businesses are still some time away from profitability. It’s time to find further ways to encourage entrepreneurship, not just digital startups, and to make it acceptable for genuine business failures. The day influential individuals speak openly about failures being acceptable, then we mark the start of true entrepreneurship. For society’s frenzy for success stories, it would also be nice to have business leaders openly talk about failures being stepping stones for potential success.

Looking at direct tax collections and GST collections, this further increases confidence about the improving economy. The question is what will drive consumer confidence to increase consumption and demand? And what will drive investments into industrial growth?

Any brash rhetoric and rash-rush of laudatory messages about capital markets won’t pull the economy on its own steam. An exuberant Content Factory has taken this far ahead; with a mass-forwarded content that has prophesied that the Sensex would cross 75,000 by August 2022, to mark the completion of 75 years of our nation’s independence.

Since when did our stock markets have such strong correlation to sheer national fervour alone, forgetting that the efforts, productivity and profitability of millions of our enterprises (big, medium, small, one-person units) make up the actual real economy?

Srinath Sridharan is corporate adviser and independent markets commentator. The views expressed are personal.

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