 "Sonal Varma")
Ever since India's business cycle moved from a slowdown to a recovery phase in early 2014, the economy has been witness to what we would call a two-speed recovery: Where consumption has done well, but investment has not; services (non-financial) have done well, but industry has not.
This composition of growth (more consumption, less investment) is not surprising given that most leveraged corporates are in the capex-heavy sectors of capital goods, infrastructure and metals and mining, and also given still-low capacity utilisation in the manufacturing sector. Meanwhile, lower inflation and falling commodity prices have boosted urban real disposable incomes and caused consumption growth to gear up.
Unfortunately, the benefits from these gains are fading. Recently released gross domestic product (GDP) data (for the April-June quarter) suggest that the new financial year started on a weaker footing. Almost 80 per cent of the growth during the April-June quarter was contributed by consumption spending alone (private and government), up sharply from 51 per cent in the corresponding quarter last year, but private consumption growth also moderated. Worryingly, fixed investment growth contracted for a second consecutive quarter. Net exports (exports minus imports) contributed positively to growth and we believe India is likely to record its first quarterly current account surplus in nine years in Q2FY16, but for the wrong reasons - weaker-than-expected imports reflecting weak investment demand.
Looking ahead, growth is likely to continue to depend on the consumption engine. Good monsoons and public-sector pay hikes under the Seventh Pay Commission should bolster consumption demand. However, for the recovery to become more sustainable, the growth balance needs to shift in favour of investment. Given weak private capex, public capex has to step in.
And progress on this front has been modest. While spending from the central government Budget is still low, project-awarding activity in roads and railways (dedicated freight corridor) has picked up, which suggests that a pick-up in actual construction should follow, though with a lag. If so, the current growth soft patch could make way for a faster uptick next year. This is indeed our baseline view, and we expect growth of around 7.3 per cent in 2016 (from 7.2 per cent in 2015), surging to 7.7 per cent in 2017.
Sonal Varma
MD & Chief India Economist, Nomura
