India is set to remain the fastest-growing large economy in the world in 2024. According to the latest United Nations’ World Economic Situation and Prospects for 2024’ report, India is likely to see strong growth and ebbing consumer price inflation. The government’s capital spending on infrastructure and manufacturing will lead to growth. That is despite India heading into a general election in May 2024. While the new government will make significant decisions, it will be an eventful year.
The Narendra Modi government will present a vote-on-account on 1 February 2024. It is also called an interim budget. The new government would present a full budget after June 2024. Faster economic growth matters to a country like India, which is now the most populated nation in the world.
As economies grow, aspirations rise. You want more good things in life to match your evolving lifestyle. Higher incomes drive higher consumption and induce a credit boom. The latest RBI survey on trends in banking and finance reveals that retail credit in India is booming. That is reflected in the strong growth in the balance sheet size of banks in India.
The RBI also observed in the report that the composition of bank credit has shifted to the services and retail sector. Between September 2021 and September 2023, banks’ retail loans grew at a compound annual growth rate (CAGR) of 25.5%, which exceeded the headline credit growth of 18.6%, according to the RBI report. Goldman Sachs estimates that the affluent middle class in India will grow to 100 million by 2027.
According to the global bank’s estimate, the current number of such people in India is around 63 million. These people have an annual income of $10,000 annually. That category of people is the spenders of consumer durables and leisure. They also actively use financial services for savings and investing. That helps banks, non-banking finance companies, mutual funds, stockbrokers and insurance companies.
Banks and non-banking finance companies led to a sharp surge in retail credit. In two years to September 2023, retail lending by NBFCs grew at 25.2%. The report added that unsecured loans account for nearly a quarter of the total retail loans and about a tenth of the total bank credit. The recent action by the RBI to slow down the growth in unsecured credit caused ripples in the BFSI sector.
However, prospects for economic growth, corporate profit growth and credit growth are more robust in the years ahead. Large global multilateral institutions like the International Monetary Fund, the World Bank Group and the UN are pinning their hope on India as an essential driver of global growth.The banking sector must play a significant role in the years ahead to sustain robust economic growth.
The government is looking to spend aggressively on infrastructure. That should continue no matter the result of the general election of 2024. Banks play a crucial role in making the necessary funding to those involved in infrastructure projects. The RBI recently published the Financial Stability Report. It does not flag any risks despite a sharp surge in consumer loans. Stress tests on banks and non-banking finance companies suggest that capital adequacy is sufficient to handle any major financial crisis.
The rapid digitisation adds a further layer of opportunity for those otherwise unbanked. Last-mile connectivity was a significant problem for banks due to the lack of will to expand the retail customer base. It traditionally meant setting up physical branches across cities. That presents an opportunity for companies in the other financial services segments like mutual funds, insurance and stockbroking.
What you can do
You need to understand the implication of the rapid growth in affluence on financial services. A conversation with a professional advisor will go a long way. You can create a portfolio of stocks that generate revenue by selling their services to affluent consumers. You can also choose exchange-traded funds or MFs to take an exposure. Work with your financial advisor to determine the correct asset allocation.
(The author is editor-in-chief at www.moneyminute.in)