Singapore: India is in the initial stages of a business cycle recovery with Gross Domestic Growth expected at 7.8 percent in 2016 and 8 percent in 2017, up from 7.3 percent expectation for this year, Japanese financial group Nomura forecast today.
"Under the new GDP series, we estimate India's potential ground at around 8 percent, which implies that the output gap will gradually narrow over the course of 2016, before closing fully by Q1 2017," said Nomura in its Asian Economic Outlook presented to media here today.
"In our view, India is already in the initial stages of a business cycle recovery," said Nomura, suggesting that growth would pick up in the next two quarters.
"The tailwinds from the low commodity prices, low inflation, the gradual transmission of 125bp of cumulative rate cuts into lower bank lending rates, debottlenecking of stalled project clearances and government efforts to kick start public investment in infrastructure should all help to keep the recovery on track," it said.
"We expect consumption demand to rise faster than capex in 2016. Higher real disposable incomes, lower borrowing costs and the income boost from the pay commission hike should boost urban consumer discretionary demand.
A normal monsoon should also support rural consumption demand in the second half of 2016, said the Nomura report.
"Overall, we expect real private final consumption expenditure to rise to 8.4 percent from 7.6 percent in 2015," said Nomura.
It also expect the investment pick up to be led mainly by faster implementation of previously stalled projects.
Infrastructure investment growth in roads, railways and renewables should start to rise.
"The government's budgeted capex is likely to be constrained in 2016 given the higher wage bill; so FDI inflows, bilateral/multilateral funding and public institution will likely fund infrastructure projects," said Nomura.
"Given ample spare capacity in the manufacturing sector and high leverage, we do not expect a substantial acceleration in private sector capex, although higher profitability, lower funding costs and continued deleveraging should gradually repair private sector balance sheets," it said.
For this year, it noted that India has diverged from most other major Emerging Markets (EMs) and embark on "what we judge to be a sustainable, multi-year economic recovery".
In 2016, Nomura expects growth to rise close to the economy's full potential.
"However, as the recommendation of the Seventh Pay Commission are implemented, we expect risks to the fiscal balance and to CPI inflation to rise, although the latter is mainly due to one-off factor," said the Japanese group.
Economic reforms are likely to continue in 2016, but incrementally, with executive decisions likely to take more of the spotlight.
"The main focus will be on the government's ability to implement the goods and services tax, state elections in mid-2016 and redemption of FCNR(B) dollar deposits in Q4 2016," it pointed out.
