Credit Growth Potential in India's Economy

A recent central bank report highlights India's potential for credit growth to stimulate economic expansion by analyzing the country's total debt to GDP ratio.

Key Findings

•  India's total credit-to-GDP ratio was 90.1% in 2022, which is below both advanced economies (AEs) and emerging market economies (EMEs), and under the estimated threshold of 113.1%. 
•  The central bank's economists suggest that a credit threshold of 113.1% of GDP could support economic growth without diverting credit towards less productive purposes. 
•  The study examined 16 emerging and advanced economies over the past 21 years to reach these conclusions. 

Economic Implications

•  Credit deepening can enhance consumption, investment, and economic activity. 
•  An inverted U-pattern is observed, suggesting that beyond a certain threshold, additional credit may be used for riskier or less productive activities, potentially dampening growth. 
•  Current credit growth has been below 15% for over three years, mainly driven by the retail sector. 
•  Lending to the private corporate sector, which constitutes about a quarter of total bank credit, has slowed in the current fiscal quarter compared to the previous quarter's high growth.