The flow of money in 2017-18 : Now both credit and deposit growth are portentously weak

Credit growth has bounced back, but still just a recovery to the already weak numbers seen in the two years leading up to demonetisation in 2016-17. Deposit growth has fallen sharply - to some extent expected as individuals and firms withdrew money forcefully deposited in banks in 2016-17 following demonetisation, but the fall in 2017-18 is to multi-decade lows! Some of it is due to reports that there is a shift in assets among households from cash to equities and bonds, but this fall suggests new income generation is weak.

Weak deposit and credit growth suggests something is wrong both on the demand side and supply side of the economy. Will the economy recover to a the RBI's expectation of about 7.5%? 

 Money supply has just about grown in line with the nominal growth of the economy.

Perhaps it is worth taking another look at deposit and credit growth all the way back to the start of liberalisation in 1990-91, and the real growth in deposits and credit (I have used the GNP deflator to strip away inflation from the nominal growth number - as in the table above- in credit and deposits).

By my estimates, real deposit growth in 2017-18 is not the lowest since 1990-91 - there were two years when the number was lower! But this gives hardly any comfort. Real credit growth, unlike the nominal number, has recovered to the level seen in the five years leading up to demonetisation in 2016-17.

The nominal and real growth numbers of the past few years pale in comparison with the super charged growth of the decade or so from about the start of the new millennium in 2000. Have the excesses of the first decade still have time to play out? The unusually sharp fall in deposit growth and the low credit growth could well be a warning that there is worse to come.

Please read last quarter's blog, and my earlier blogs on this subject.