Indian Private Credit Creation Adds 6.3% Month On Month In August Of 2017 To The Economy

by: Alan Longbon


Indian private credit creation adds 6.3% percent month-on-month in August of 2017 to the economy.

Positive fiscal flows add to the stock of funds in the private sector and negative flows take them away.

Overall, the fiscal flows are strong at 5.5% going forward but decelerating.

A positive macro picture for a land one is looking at investing in is a real prerequisite, and the purpose of this report is to assess if India has a positive macro environment within which to invest.

One can summarize the national accounts in the following formulae:

Private Sector [P] = Government Sector [G] + External Sector [X]


GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

These are accounting entities and are true by definition.

See the methodology section below for more detail on this formula.

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - Banks lend more than is repaid in loans.

  2. Externally from overseas commerce - Exports bring in more than imports cost.

  3. Government spending - More is spent than taxed.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow even if one or two of the three flows are negative.

The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks such as defensive sectors like consumer staples and utilities.

We will look at each inflow in turn and start with the private sector all the while updating our forecast result based on the latest data.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

This is the new data that we have and can add to our fiscal flow sector model.

The new data is that loan growth is steady in the 6% range.

Longer term one sees that overall loan growth is decelerating.

There is no measure of total loans to the private sector, and the closest one can come is a measure of domestic credit to GDP dating back to 2015. Because India's GDP has grown each year by 7%+, it means the stock of debt has grown in absolute terms even if holding steady as a percentage of GDP.

The chart shows that credit growth is occurring in India. Credit growth added 3.2% to GDP in 2016 and is on track to do less than that in 2017. The rate of credit growth is slowing overall.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports minus imports, and it also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. India has a poor current account balance with more funds flowing out than in. This year is looking to be more of a drain than 2016 on overall fiscal flows.

The result for 2017 is likely to be slightly worse than for 2016.

Government Sector

The government budget is shown in the chart below:

The government budget picture is largely positive with a net injection of funds into the private sector. The trend though is in decline.

The government has done some strange things in the recent past with regard to taxation and the money supply. The government introduced a value-added tax that makes business transactions more complicated, but a boon for the accounting profession, and removed several bank notes from circulation - all to increase tax collection and drain money out of the private sector.

The government spending pattern is a close match to 2016 with overall slightly less spending and more taxation. The end of year result will most likely be slightly less than last year if present trends hold.

The Indian government is a monetary currency sovereign with a freely floating exchange rate, and so there is no functional link between taxes, borrowing, and spending. It is the source of the money. With relatively high general unemployment at 5%, youth unemployment at 12% and a labor participation rate of 52% there is room for more government spending to engage these idle resources the private sector has no use for.

A declining inflation rate of 1-2% shows that the economy can absorb new workers and more aggregate demand without inflation risk.

Sectoral Analysis Methodology

Each nation state is comprised of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector includes the people, business, and community, and most importantly for investors, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

The external sector is trade and commerce with other countries. This sector can provide income from a positive trade balance, or it can drain funds with a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to flow in. Otherwise, the sector can only circulate existing funds or is losing funds and in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

Private Sector = Government Sector + External Sector


GDP = Private Sector + Government Sector + External Sector

These are accounting entities.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are all in plus and trending upwards.

Conclusion, Summary, And Recommendation

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation


Government Sector


External Sector





3.2% 3.5% -0.7% 6%






(Source: Trading Economics and Author calculations based on same)

The Indian macro fiscal flows are strong at over 5%. There is scope for financial assets such as stocks, bonds, and real estate to rise given that the private sector is receiving such an inflow of funds. On the downside, the flows are decelerating in all three income sources.

An investor wishing to have exposure to the Indian stock exchange can do so through the following ETFs:

  • iShares MSCI India ETF (BATS:INDA)
  • WisdomTree India Earnings Fund (NYSEARCA:EPI)
  • iShares India 50 ETF (NASDAQ:INDY)
  • PowerShares India Portfolio ETF (NYSEARCA:PIN)
  • iPath MSCI India Index ETN (NYSEARCA:INP)
  • VanEck Vectors India Small-Cap Index ETF (NYSEARCA:SCIF)
  • EGShares India Consumer ETF (NYSEARCA:INCO)
  • iShares MSCI India Small-Cap ETF (BATS:SMIN)
  • Direxion Daily India Bull 3x Shares ETF (NYSEARCA:INDL)
  • EGShares India Infrastructure ETF (NYSEARCA:INXX)
  • EGShares India Small Cap ETF (NYSEARCA:SCIN)

I last looked at India in this article in February 2017 and recommended it as a buy due to the strong fiscal flows. If one had invested in India following the article, one would have seen 12% capital growth return, and a modest 1.14% dividend as the chart below shows. Not a bad effort where timing played a key role. The Indian stock index has been largely flat since 2010, and one would have been less than well compensated with a 1-2% dividend return over the period. There is growth occurring in India but it has not yet expressed itself strongly in the stock market tracking index.

The fiscal flows are still strong, though, in decline, one can expect more of the same going forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.