Few aspects are encouraging, but not all growth cylinders are firing away in India

Not all growth cylinders are firing at once, some are showing progress. Better production numbers and improved discretionary spending are encouraging, though the capex cycle is yet to take-off convincingly. Firstly, industrial production quickened in Jul-Aug15 up 5.3% YoY from 2.8% in the Jun quarter (1Q of fiscal year 15/16). Pick-up has been broad-based, with heavy-weight manufacturing along with electricity and mining output picking speed in Jul-Aug15 compared to the quarter before. On the use-based end, capital goods jumped 16% in Jul-Aug15 from 2.1% in 1Q FY16, with consumer goods also receiving a hand from better durables output. Both manufacturing and services PMIs have also improved in the Sept quarter. 

Next, discretionary spending is turning up at a modest pace. Urban consumption is seemingly in a better shape as easing inflation boosts real purchasing power and passenger car sales improve. Consumer durables output is also off its back, as financing costs ease. Rural demand however remains sluggish, weighed by three successive bouts of sub-par monsoon seasons. Two-wheeler sales have slowed alongside weak rural wage growth, with cutbacks in entitlement-based fiscal spending also hurting demand. 

Finally, softer inflation provided the Reserve Bank of India with the room to cut interest rates. The cumulative 125bps cuts have since pushed down money market rates and banks' base rates. On the other hand, investment spending is still to convincingly pick-up, with the government expected to lead capex revival before the private sector returns to the table. However trends are not encouraging. Fiscal expenditure in first five months of the fiscal year amounted to 40% of annual target, raising doubts over expectations of front-loading disbursements. 

Stalled projects, meanwhile, jumped back to 7.6% of GDP in the Sep quarter from sub-7% quarter before, according to the press. Not surprisingly, an increase in new investment announcements is being viewed with scepticism, as familiar hurdles of land acquisition, delay in clearances e.t.c. are still to be completely ironed out. Capacity utilisation rate meanwhile continues to ease. These subdued levels of activity have weighed on the banking sector, reflecting in higher stressed/ bad assets and weak credit growth. In addition, weak exports will weigh on growth. Exports account for a quarter of the GDP, but with imports' weightage also equally strong, net exports have persistently been a drag on growth. 

In all, aggregate demand conditions are likely to improve gradually in the coming quarters, along with a cyclical upturn in industrial activity driven by higher government-led infrastructure investments, lower financing costs and easing inflation. Structural tailwinds are however on a slow lane, with progress on GST, land acquisition and labour reforms delayed at least until the winter parliamentary session in Nov/Dec. This will impinge on the economy's return to high growth rates. FY15/16 real GDP growth is seen at 7.4% with downside risks, vs 7.3% year before.