Mumbai: Lackluster investment and capital expenditure are key missing pieces from India’s growth story and Asia’s third-largest economy is likely to face another year of uneven growth, global brokerage DBS has said.
Domestic growth is thereby likely to be driven more by consumption demand than capital investments, DBS said in a report on Wednesday.
According to the report, private consumption is likely to grow at 9 per cent in 2016-17 from 7 per cent in the just- concluded fiscal. Urban demand is already on the mend, while rural spending is set to gain from a normal monsoon this year.
An easy monetary policy is also of help. Net exports remain a drag as weakness in exports outweighs the benefits from a narrower oil imports bill, it said.
In all, the report said the headline real GDP growth is likely to average 7.6 per cent this year from an estimated 7.4 per cent in FY15-16.
“Lackluster investment and capital expenditure are important missing pieces in the country’s recovery story,” DBS India economist Radhika Rao said, adding project execution moderated during Q1 2016, raising skepticism on the improving new investment announcements.
“Investment spending is unlikely to gain ground on constrained fiscal space, a leveraged private sector and lop-sided foreign investments. Hence, the report expects another uneven recovery in FY16/17,” she added.
Gross capital formation fell four ticks in the last three years, to below 30 per cent of GDP by December 2015, the report said, adding “this pales in comparison to China’s investment growth, which makes up 45-50 per cent of GDP.”
Foreign direct investments (FDI) inflows rose to a record high in FY15/16. Unfortunately, its distribution is not geared towards boosting the domestic capex cycle. These factors suggest that a strong turnaround in investment spending is unlikely this year, it said.
The overhang of easing global growth has also amplified this slowdown. Domestic growth thereby is likely to be more about consumption revival than investment spending, this year, the Singaporean brokerage said.
Growth of fixed capital formation has slowed from over 10 per cent in FY13-14 to 5 per cent in the first three quarters of FY15-16, it said.
Stalling of projects has been a major contributor to this decline, with its stock rising to Rs. 11.4 trillion by March 2016 from Rs. 8.6 trillion in 2013.
Land acquisition and lack of clearances are no longer the key reasons behind the stalled projects as the two factors accounted for about a tenth of the stalled projects last year, down from 27 per cent in FY11-12, it said.