Gradual recovery underway for India’s economy

With a structural boost over the next two or three years.

The short term may look a little bit bleary with growth returning later than expected, but the Indian economy is definitely at the cusp of a cyclical recovery.

According to a report by DBS, the return to a GDP above 6% will likely be in FY16, rather than earlier. While recovery is proceeding, investment and manufacturing undershot expectations in 1H FY15.

DBS expects this to impact 2H performance as well, which accompanied by lower government spending and weaker net exports, puts FY15 and FY16 forecasts at risk.

Here’s more from DBS:

Firstly, the fiscal math is worrisome as the Apr-Oct14 fiscal deficit stands at 90% of the full-year target on weak revenues and slow implementation of divestment deals. With the government intent on meeting its fiscal targets, further reduction in expenditure is likely in the Mar15 quarter. Government expenditure contributed an average 1.1 percentage points to 1H growth but this might slow to half the pace in 2H. Next, net exports are also likely to weigh on GDP growth.

Export receipts stand to moderate on real rupee appreciation, weak commodity terms of trade and uncertain global demand backdrop, while imports accelerate on gradual investment turnaround.

In addition, we look for industrial activity to rise 3.7% in FY15, weaker than our earlier 5% estimate. Projects under implementation, commercial vehicle sales and revival of stalled commitments look up but add-on benefit to capex interests have been slow. On the positive end however, supportive factors of easing inflation, buoyant sentiments, push to jumpstart the capex cycle, wealth effects and a strong political will to provide a conducive business environment should complement the recovery cycle.