Private consumption, public spending likely to trigger India’s growth this year

India’s growth this year is likely to be primarily driven by private consumption and to a lesser extent public spending, while private sector activity is yet to recover. Investment spending fell 1.9 percent y/y in 1Q16, from 1.2 percent in late-2015. Higher public investments (helped by off-budget funding) and FDI inflows are expected to crowd-in private sector interests next year.

Stalled projects as a percentage of projects under implementation remained high at 12.3% in 2Q16, bulk of which accrued to private sector projects, according to the CMIE. Manufacturing, construction and real estate projects accounted for much of this increase.

However, new investment announcements slipped in the quarter, with private sector commitments plunging 60 percent q/q. Corporate earnings are poised to gain some ground this quarter, but manufacturers’ pricing power remains under pressure. Industrial lending slowed to 0.5 percent y/y in Apr-May in contrast to the personal loans that jumped 19.4 percent. Poor demand conditions, high cost of borrowing, delayed clearances and cost escalation remained the main constraints toward the delayed recovery in the sector.

Secondly, exports remain under pressure limiting visibility of orders and thereby lowering the need to deploy or build capacities. While the year-on-year performance gets a lift from base effects in the coming months, export receipts are still about 16 percent below 2014 levels.

Finally, stressed private sector balance sheets have also translated to asset quality concerns for banks. Gross non-performing assets (GNPA) jumped to 7.6 percent of total advances by March 16 and are likely to surpass 8 percent by Mar17.  Further lending rates have inched down at a much slower pace than market borrowing costs, pushing part of the credit demand to money markets and corporate bonds space.

Meanwhile, a combination of unfavorable demand dynamics, under-pressure balance sheets and excess capacity has hamstrung a quick revival in investment cycle. While a turnaround this year might prove elusive, a combination of higher off balance sheet public spending and FDI inflows to spur private sector activity next year, DBS reported.