The flow of money does not suggest that India’s economy will move to a significantly higher growth path soon

Money is a fuel that economic agents use to produce and deliver goods and services. So let’s look at the numbers to get a sense of the prospects of India’s growth in 2015-16 and the next year.

The tables below give the numbers for deposit mobilisation and credit disbursed by banks in the current financial year up to January 22, 2016. Both this financial year and over the last twelve months ending January 2016 there has been an increase in credit growth by 1 to 2%. Deposit growth has seen no change. 

A lag between credit creation and economic growth is to be expected as economic agents first build factories, make purchases of raw materials and then run the factories and deliver goods to consumers. This suggests there is likely to be a pick-up in India’s economy in 2016-17. But the pick-up is likely to be slow. During the years from 2004 to 2008 when the economy was growing in the 8-10% area, credit grew well in excess of 20% per year. Deposits during the same period grew close to 20%.

Let’s also look at two other foundations of money in the economy -money supply and reserve money? Reserve money consists of currency in circulation and the deposits of banks with the RBI. It is reserve money that the RBI can use to influence the growth of money supply. Money supply consists of currency in circulation, demand deposits (money in savings bank and current accounts) and time deposits (fixed deposits).

The tables below give the numbers.

The trend in the current financial year suggests barely any change in the growth of money supply –about 11%, roughly the same as last year. During India’s high growth years from 2004 to 2008 money supply grew by close to 20% per year.

The picture on reserve money is different – there has been a jump in growth: 12% over the last one year compared to 10% in the previous year. Does this suggest acceleration in money supply and credit in 2016-17? The potential is there but it is still early days to make a confident call.

In conclusion, the money flows during the current financial year upto January 22, 2016 does not suggest a sharp buoyancy in the economy. There is some pick up in credit, which could lead to slightly higher growth next year – we are, however, still far away from the boom years of 2004 to 2008.