But even as stability has returned, growth has not followed suit. The new gross domestic product (GDP) series suggests a rollicking economy but, as has been widely discussed, the data just does not sync with the reality on the ground over the last few quarters. Instead, a variety of high-frequency indicators - particularly corporate earnings growth - have reflected growth's soft underbelly over the last few quarters.
Of particular lament is the lack of investment growth over the last three years. Pre-crisis fixed capital formation grew at 14 per cent a year for five years! Over the last three-years, it has grown at a paltry 1.6 per cent a year. Why does this matter? Because it was the capacity-creating investment growth pre-crisis that meant that core inflation averaged less than five per cent even when GDP growth was steaming along at nine per cent. And, it was the absence of investment-led growth that meant that core inflation rose to nine per cent post-crisis even as growth has slowed markedly. All told, the quality of growth matters every bit as the quantity.
And this is where some goods news is finally emerging. After three years of dormancy, there are early signs that something is stirring on the capital expenditure (capex) cycle led by infrastructure investment. What is the evidence to support this?
Capital goods production has increased smartly within the Index of Industrial Production (IIP) and is averaging 10 per cent over the last three months, a consistency and level not seen since the spring of 2011.
Admittedly, given that the IIP is notoriously volatile, the risk of over-interpreting a few data points is high. Therefore, to distinguish whether this is signal or noise we looked at the sales of capital goods companies in the BSE 100. We find that sales in real terms are averaging 10-11 per cent over the last two quarters, adding credence to the cap-goods production lift.
Third, lending to infrastructure is picking up. Given the dramatic fall in inflation, its important to distinguish between nominal and real variables. In real terms, credit off-take to infrastructure grew at over seven per cent over the last three months, compared to five per cent all of last year
Fourth, the momentum of commercial vehicle sales has ticked up smartly over the last few months.
And finally, orders books in the road-sector are thickening, with the National Highway Authority of India (NHAI)'s order book increasing by nearly 13 per cent and Larsen & Toubro's (the best proxy for infrastructure in India) increasing by 28 per cent.
So something is clearly stirring on the ground. But the question is how will this be financed as the cycle picks up? Given the level of impaired assets and capital constraints, public sector banks are understandably averse to cutting rates and growing their asset books, thereby impeding monetary transmission. So broader credit growth remains anaemic, and is often cited as a symptom of weak growth.
But we believe credit is going to be a lagging, not leading, indicator of growth in this cycle.
Instead, the early part of the capex cycle is likely to be financed by non-bank sources that have experienced far greater monetary transmission. Take the case of corporate bonds: Yields have fallen by 75 basis points since last September and, between April and December last year, corporate bonds accounted for nearly a quarter of all flows to the corporate sector compared to an average of 15 per cent in the past years. In fact, during that time, corporate bonds and foreign direct investment together accounted for about 43 per cent of corporate funding, even higher than bank credit! So non-bank sources are likely to dominate in the early part of the cycle.
Complementing this is the fact that in the transportation sector, most capex is likely to happen on the back of government-funded cash contracts ("the EPC" model) from higher budgetary allocations instead of the erstwhile BOT ("Build-Operate-Transfer") model.
So what's changed? What's driving this pick-up? A confluence of three factors, in our view. First, implementation bottlenecks on the ground (coal, environmental clearances) - which were long a binding constraint - are being alleviated with stalled projects falling for a sixth quarter between April and June. Second, a front-loading of government capex spending - which grew at 138 per cent in the three months leading up to May.
The government's intention appears clear - to bunch up capital spending early in the year to help crowd-in private capex. Finally, monetary conditions have eased in recent months on the back of rate cuts and some real depreciation of the currency in April and May. We believe all three factors have conspired to drive some lift.
But even as hopes are rising, it's important to be realistic. For now, any capex lift is expected to be modest given prevailing headwinds. Even as firms are able to tap non-bank sources of financing, banks' risk aversion linked to their capital constraints will eventually become a binding constraint on incremental financing. And while implementation bottlenecks are easing, land acquisition remains an impediment for many infrastructure projects, with prospects of near-term reform reducing. Finally, even as roads, power, railways and defense sectors are likely to get a boost, investment in commodity-intensive sectors is likely to remain weak amidst depressed global commodity markets. But these headwinds are known.
For now, let's at least heave a sign of relief that the much-awaited capex cycle - lying dormant for many years - may finally be shaking off some of its slumber.
The author is chief India economist at JPMorgan. All views are personal