India's economic recovery is gradual: analysis

Economic growth breakdown puzzling and disappointing.

Standard Chartered has raised its FY17 (year ending March 2017) GDP forecasts to 7.7% y/y from its initial projection of 7.4% on upside surprises in the FY16 GDP release.

According to a research note from Standard Chartered, FY16 showed 7.6% GDP growth, much faster than 7.2% in FY15. However, Standard Chartered does not think that economic activity has picked up as strongly as suggested by the GDP report.

Standard Chartered emphasises that the recovery remains gradual. Since the GDP breakdown raises more question than provides answers, Standard Chartered focuses on the gross value added (GVA) measure to underline its view of gradual economic momentum.

FY16 GVA grew 7.2%, only marginally better than 7.1% in FY15. Standard Chartered expects GVA to improve further in FY17 to 7.4% on higher household consumption as public-sector employees receive higher pay and the monsoon is expected to be favourable. We believe consumption will remain the growth driver in FY17.

Here's more from Standard Chartered:

GDP growth breakdown is puzzling and disappointing. This release has two inter-related puzzling aspects. First, despite the widely held view that investment (driven by government capital expenditure) improved in FY16 and drove the economic recovery (instead of consumption), the FY16 GDP data showed that this was not the case. It shows that real investment, or gross fixed capital formation (GFCF), actually slowed to 3.9% y/y in FY16 after 4.9% in FY15. The slowdown in nominal investment was even worse, at 3.3% from 7.9%.

Even if we assume that we were wrong to expect that increased public investment would offset the private investment slowdown, the surge in household consumption seems incredible. Household consumption showed a 7.4% rebound in FY16 from 6.2% y/y in FY15 in the latest release. We agree that urban demand improved, but with insipid rural demand for most of FY16, such a surge in household consumption is puzzling. Rural demand is 40-50% of total household demand.