Directing credit to promising sectors to boost the strong economy

The economy has been performing strongly, surprising many stakeholders. The 8.2 percent GDP growth and 8.1 percent GVA growth in Q2 of FY26 surpassed the RBI’s and the government’s forecasts. Increased consumption and a healthier manufacturing sector drive the growth momentum. Not only in Q2 of FY26, but the economy’s resilience has also remained consistent over the past three financial years. The quarterly trend shows GDP and GVA growth rising from about 6–7 percent in FY 2023-24 to roughly 7–8 percent in FY 2024-25, and increasing further to around 8% in the first half of FY 2025-26, indicating a strengthening growth trajectory. 

The sectoral contribution to GDP over the past three years will also highlight the potential for increasing sectoral lending activities. The agriculture sector’s contribution to GDP increased from 18.5 percent, 19.7 percent, and 19.7 percent; the industry sector contributed 26 percent, 25.3 percent, and 25.3 percent; and the share of the service sector remained steady at 55.5 percent, 55 percent, and 55 percent in fiscal years 2022-23, 2023-24, and 2024-25. Banks can design their business strategies and working models to harness the rising sectoral-specific potential. 

The future trajectory of growth could see further benefits from rationalizing GST rates, lowering income tax rates, cutting interest rates, lowering borrowing costs, and a Rs. 45000 crore relief package for exporters to offset the tariff increase. The export promotion mission (EPM) 2025-26 to 2030-31, along with expanded credit guarantee and liquidity support, can provide the necessary boost. Based on the movement of high-frequency indicators and forward-looking outlooks, the average GDP growth in FY26 could exceed 7 percent.  

The high-frequency indicators across many parameters, such as the increase in E-way bills, GST collections, a surge in travel and tourism, freight, logistics, trade links, petrol consumption, rise in air cargo, sales of two-, three-, and four-wheelers, tractors, port cargo traffic, gasoline use, passenger handling at airports, sales of computer hardware, investments in AI tools to harness technology, and growth in gig workers, clearly demonstrate the overall growth momentum of the economy. Each of these activities has the potential to increase demand for credit and can also eventually provide deposit resources to the banking system. 

• Key indices of the economy: 

The HSBC India Manufacturing PMI has stayed well above 50 so far in FY26, indicating ongoing expansion. It increased from around 57–58 in early FY26 to 59.2 in October 2025, one of the highest readings in the current cycle and close to a 17-year high, mainly driven by strong domestic demand, the effects of tax reforms, and tech-led productivity improvements.

The HSBC India Services PMI has remained firmly in expansion territory (well above its long-term average of 54), supported by resilient domestic demand and GST relief. It was 60.9 in September 2025 and decreased to 58.9 in October 2025, still indicating strong growth but with some slowdown due to stiffer competition and heavy rains.

The Composite PMI Output Index averaged about 61.8 in Q2 FY26, the highest since 2008–09, and reached 60.4 in October 2025, well above the 50 neutral level and long-term averages. Together, the rise to around 59–60 in manufacturing and 58–61 in services through April–October 2025 indicates broad-based, above-trend momentum in activity, consistent with Q2 FY26 real GDP growth of 8.2 percent and strong growth prospects for the rest of FY26.

The GVA growth for Agriculture & Allied, the primary sector, during H1 was 3.5 percent; Industry, the secondary sector, recorded a GVA growth of 7-8 percent, while the services sector, the tertiary sector, exceeded 9 percent GVA growth. These sectoral trends align with the overall real GDP growth of 7.8 percent in Q1 and 8.2% in Q2, with the upside surprise in Q2 mainly driven by manufacturing and high-end services. In H1 of FY26, agriculture contributed 16 percent to GDP, industry 28 percent, and the service sector 56 percent. Despite these contributions, the flow of direct bank credit does not match the ratio of GDP generated by each sector. 

The flow of credit to the productive sectors is essential for maximizing the economy’s potential. Banks have to quickly prepare to utilize the autonomy granted by the RBI to boost credit flow.  The latest data from November 2025 shows that bank credit growth of 11.4 percent continues to outpace deposit growth of 10.2 percent. 

The credit-to-deposit ratio has exceeded 80 percent, suggesting that some banks may rely on market borrowing to manage liquidity risks. Credit growth for FY26 is projected to reach 11.5 percent, with the capital adequacy ratio exceeding 17.2 percent. NBFCs are actively joining to spur the flow of funds to the commercial sector, supplementing banks’ efforts.

When the sectoral outstanding credit is measured as a share of total bank credit, the agriculture sector accounts for 14.18 percent, the industry for 25.77 percent, and the service sector has a share of 12.37 percent; the remaining credit flows to target loans such as personal loans (consumer credit, education, automobile loans, etc.) for consumption purposes. 

Housing loans, credit cards, trade finance, and working capital for small and medium enterprises outside the corporate classification also constitute parts of the credit. Next are loans to Non-Banking Financial Companies (NBFCs) for on-lending and financial services. Miscellaneous sectors, such as exports, infrastructure projects, transport, and logistics, that are not fully classified receive the remaining bank credit. 

Given the buoyancy of the economy, banks’ internal business models and strategies will need to be realigned to target credit toward sectors that are driving GDP/GVA. Identify their sector-specific sub-activities that are growing and adjust risk management strategies accordingly, leveraging digital innovations and digital public infrastructure to broaden outreach. 

When considering sectoral interlinkages and interconnectedness, lending to MSMEs should be the focus to support the gradual growth of local businesses. The corporate sector has many options for accessing funds, but MSMEs remain a vital yet vulnerable part of the economy that needs sufficient credit support to eventually expand into larger companies. The challenges and risks of lending to MSMEs must be addressed while keeping the broader, long-term economic goals in mind. A short-term perspective may result in a narrow focus on MSMEs. 

While assessing the cost-benefit and profitability of lending activities, a ‘one size fits all’ approach may overlook sectors that significantly contribute to the economy but yield low profits for lenders. A balanced approach to profit planning through sectoral credit deployment should be evaluated using a scorecard model that aligns returns on the sectoral portfolio with its importance to economic growth. 

Ultimately, strengthening the weaker but vital sectors of the economy reinvests in creating a healthy economy and a strong business environment where delinquencies decrease and a robust borrower base grows. 

If banks simultaneously expand into high-productivity segments, protect balance-sheet resilience, and exploit India’s digital public infrastructure, they can both harness and sustain the current phase of high GDP and GVA growth rather than be destabilised by it.

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