Budget 2022 is impactful, but private consumption and credit growth remain concerns: Edelweiss’ Financial Services’ Rashesh Shah

“Consumption remains weak,” he said, adding that the government maybe should have spent more to put cash in the hands of people through social-welfare programmes. The central bank’s accommodative monetary policy has only helped the upper ranks of the income pyramid. “Everywhere in the world, I say monetary policy is for the haves and the fiscal policy is for the have nots,” he said.

About his outlook for the coming year, he said that, while equity markets will continue to remain buoyant, more needs to be done to support the credit market. Without a robust credit market, the GDP growth target may become hard to meet. 

“If you are expecting 8% to 9% GDP growth, with 4-5% inflation, your nominal growth has to be 13-14%. So the credit growth has to be higher than that. That is the key parameter to watch more than anything else,” he said. As of now, credit growth is in the single digits–between 5% and 8%.

Read also: Has the government changed its spending priorities?

Here are six important takeaways from the interview.

*Fiscal deficit could have been 40 to 50 bps higher.

“This is the time to spend… I had hoped for a slightly higher fiscal deficit. Another 40 to 50 bps spending on the fiscal deficit would have been of great use to the economy,” said Shah. 

*Government needs to spend since private capex remains subdued. 

“Private capex is still a year away (from taking off). A lot of corporations in India are growing through acquisitions, not through greenfield investments. This is where the government will have to step in and spend, on roads and so on,” he said.

*More spending needed to drive up private consumption.

“Consumption remains weak… so the government stepping up spending on (social-welfare) programmes can help,” he said, adding that perhaps the government is keeping its powder dry. “I suspect the government is holding back some ammunition to step in with some social programmes, to put some cash in the hands of people, if the growth momentum keeps going up or the consumption remains weak,” he said.

*In banking, asset quality is not the problem, credit growth is.

“We have been grappling with this asset-quality (problem) for the last four to five years. But that debt cycle has played out,” he said.

“Current issue to worry about is credit growth. Credit growth is still hovering between 5 to 8%, which is not good for the economy. Any single digit credit growth isn’t good for the economy.”

The buoyancy seen in the equity markets is missing from the credit market. “If the economy has to take off, if capex has to take off, we need optimism in the equity and the credit markets. Credit growth to be at least at least 14-15 per cent,” he said. 

*FIIs pulling out will not upset the equity market but could affect the credit market.

“Over the last 25 years, as India’s household savings, financialisation of assets and capital markets are growing… (and therefore) that particular dynamic (of FII’s sway over the equity markets) has been changing,” he said. The Indian investor has been able to bridge the gap created by FIIs’ subdued inflows or even FIIs’ outflows, he added.

“The problem is on the other side… long-term infra projects have to be funded by credit,” he said. “Who is going to give them loans? Earlier there used to be financial institutions such as IDBI and IFCI, but not anymore. Last year, the government announced the creation of a new development financial institution (National Bank for Infrastructure Financing and Development)... I think that is where the gap is, as the global interest rates go up and liquidity goes down,” he added.

“My real fear is about the long-term credit availability in the absence of bond markets in india. So the way we have developed our equity markets, if we can develop our bond markets, then we can offset the huge dependence on foreign inflows,” he said.

“Credit markets need a lot of innovation, experimentation and open mindedness. The conversations are going on,” he added.

*Confident about sentiment and growth, cautious about liquidity. 

“Three things determine (the outlook for the coming year). Sentiment in the short term, liquidity in the medium term and growth in the long term. Last year, we didn’t have growth because of the pandemic and such, but sentiment and liquidity had been very positive. So, two out of three. This year, in the next twelve months, liquidity will normalise… there will be a reversal. Sentiment is positive and the growth will catch up. So, like last year, two out of three(going for us). This year growth should hopefully replace liquidity,” he said.