Nomura expects GDP growth to recover to 7.8% in 2016 from 7.3% in 2015, due to higher public capex, upcoming pay commission awards and a normal monsoon and better agricultural growth
Nomura says its economic heat-map of high-frequency data indicates that economic activity rebounded in early 2016 from the weakness observed at end-2015. "Urban consumer demand, services and government capex remain the primary drivers of growth, but there are nascent signs of an improvement in external demand and infrastructure sectors. Industry and private investment remain weak," it says in a research note.
To gauge India's growth momentum and the near-term monetary policy path, Nomura has launched five proprietary indices, Nomura Composite Leading Index (CLI), India economic heat-map, Monthly Activity Indicator, Nomura Economic Growth Surprise Index for India and Nomura RBI Policy Signal Index.
According to Nomura, while co-incident indicators suggest better momentum, leading indicators still suggest non-agriculture GDP growth will consolidate over the next two quarters. Still, it says it expects GDP growth to recover to 7.8% in 2016 from 7.3% in 2015, due to higher public capex, upcoming pay commission awards and a normal monsoon and better agricultural growth.
It says, "There are two notable changes over the last two months. First, external demand (non-oil export volumes and visitor arrivals) appears to be improving at the margin, albeit from very low levels. Second, infrastructure sectors such as coal, cement and power are also experiencing an uptick, likely reflecting public infrastructure projects gaining traction".
"However," it said, "the overall level of industrial activity still remains tepid. Additionally, with government capex growing at over 50% in the three months ending February 2016, the sustained contraction in capital goods suggests still-weak private sector investment."
In addition, Nomura says its policy signal index is now in the neutral (no action) zone, consistent with its view that the RBI will stand pat for the rest of 2016. "Apart from the upside risk to inflation from the seventh pay commission, we do not see CPI inflation undershooting the RBI’s 5% target on a sustained basis, as most of the cyclical factors (oil price fall, rural wage growth deceleration and growth slowdown) that drove the disinflation are behind us, while structural factors (agricultural reforms, infrastructure creation and skill creation) will take time to materialise. Instead of rate cuts, we expect the focus to remain on improving policy transmission through adequate liquidity infusions," it concluded.