Economy on the mend post-Covid, but inflation, Ukraine may act as dampener

In an indication that the economy may be heading towards a sustained recovery post the Covid pandemic despite high inflation, two separate data points, one on the country's manufacturing activity and the other on loan growth by banks Monday showed better than expected rise.

The country's manufacturing activity improved in April as orders and global sales increased. The S&P global Manufacturing Purchasing Managers Index (PMI) rose to 54.7 in April from 54 in March. International demand rose to a nine-month high after a contraction in March. On the job front, however, noting much has changed.

Separately, the data brought out by a State Bank of India report suggested banks' loan growth rose 10.5% in 2021-22 from 5.8% a year before.

Segment-wise, the jump in credit (loan) to MSMEs and infrastructure was strong at Rs 2.3 lakh crore while credit to housing and NBFC sector was close to Rs 2 lakh crore. Retail loans expanded by a sharp Rs 3.7 lakh crore, driven by a surge in personal loans apart from housing credit.

Credit to agriculture was at Rs 1.3 lakh crore.

"It seems that the economy was able to shrug off, to a large extent, the after effects of the pandemic as credit growth was broad-based across all sectors," said Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI and the author of the report.

The the share of bank credit in GDP is likely to cross 50% in the current financial year, from a decade low of 27% in FY2022, an SBI research report said on Monday. The credit to GDP share was a high of 63% before the pandemic.

A higher credit-to-GDP ratio indicates the banking sector is participating actively in the real economy by disbursing formal credit.

The report, however, cautioned that the ongoing crisis in Ukraine and expected central bank monetary policy tightening could act as a dampener on loan demand and the current inflation trends could play a spoilsport too.

On the manufacturing output side, firms produced more.

"Factories continued to scale up production at an above-trend pace, with the ongoing increase in sales and input purchasing suggesting that growth will be sustained in the near-term," Pollyanna De Lima, economics associate director at S&P Global, said.

The data comes a day after the historic GST collection numbers, which broke all records since the inception with a collection of nearly Rs 1.68 lakh crore in April.

"The core challenge though remains from a cost perspective, as the rise in imported price pressures continues to feed through input and output prices, both of which rose further in April, with the output prices index hitting a 12-month high," he added. Companies have passed on the price rise to customers, but the demand for their goods could be hurt in future, the PMI survey said.

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