The flow of money in 2015-16: what do the numbers tell us?

Money flow measures - deposits, credit, money supply and reserve money – grew at historically low rates in 2015-16, although there was a good pick-up in credit. Looking at these measures in real terms – after stripping out inflation - the picture is positive. In real terms these measures grew at the highest pace since 2009-10. This suggests an improvement in India’s economic prospects could be expected in 2016-17 – perhaps with a small  pleasant surprise if the international environment remains stable.

This is an update of my earlier blog on February 16, 2016.  Below are the numbers covering growth of bank deposits and credit, money supply and reserve money for the last financial year, 2015-16.

Deposits and Credit Growth

Deposits grew by just 10 % in 2015-16, the slowest pace of growth since the start of India's economic reforms in 1991.

The pace of credit growth picked up but was also low looking at the period since 1990-91. Notably it outstripped deposit growth for the first time since 2011-12. This should be positive – suggesting that there is more investment beginning to take place.

Let’s look at the real growth in deposits and credit – i.e. the growth of deposits and credit after stripping out inflation. For judging the level of inflation, I have taken the GNP deflator (the difference between the country’s national product in current prices and constant prices) instead of consumer price inflation or wholesale price inflation. This appears more suitable as it captures the prices paid by all economic agents - consumers and producers.

The table below gives the real growth in credit and deposits since 1990-91.

  

In real terms, the picture of deposits growth is better – in 2015-16, deposits grew at the fastest pace since 2009-10. Note during 2003-08 period, when India grew at 9% per year, deposits grew at 14% per year!

The picture on credit growth also looks better in real terms. In 2015-16, credit grew at the fastest pace since 2010-11. Again, note during the high growth period of 2003-08, credit grew by 20% per year!

 Money Supply and Reserve Money Growth

With the dip last year, the growth in money supply seen last year was the lowest since 2001-02.

As the year drew to a close, reserve money growth picked up and grew faster than last year, but like all the other numbers above remained low, looking at the period from 2001-02.

The table below shows the real growth in money supply and reserve money since2001-02. The numbers have been calculated just as I calculated the real growth in deposits and credit – after stripping out inflation.

 In 2015-16, money supply in real terms grew at the fastest pace since 2009-10, but far less than the 13.5% number registered during the high growth period of the economy during 2003-08. The picture is quite the same when we look at reserve money growth – fastest growth since 2010-11, but significantly lower than the 13.5% clocked during 2003-08.

Money is arguably the engine that spurs the economy forward. These numbers suggest that an increase in the growth of India's economy can perhaps be expected this year (2016-17), but the increase is likely to be modest.

The government’s Economic Survey expects growth between 7.25 and 7.75% in 2016-17 –the mid-point of this range is just about the same as the 7.6% estimate of the government last year. The RBI expects the economy to grow by 7.6% in 2016-17, a tad higher than its estimate of growth of last year of 7.3%.

My sense is the growth number could be a little better than expected, if international environment remains stable. Here China’s performance is a key contributing factor, as I have emphasised in many of my earlier blogs.