New Delhi, Jul 14 (PTI) Business activity picked up in the second quarter of 2015, largely on the back of better investment demand and improvements in commercial vehicle sales, Goldman Sachs said today.
The global financial giant said its composite gauge of business activities is showing a gradual recovery after a "surprising slowdown since the last quarter of 2014", but it cautioned that there is not yet a broad-based recovery.
"While on balance activity data seem to be turning more positive, we would caution that there is not yet a broad-based recovery," Goldman Sachs said in its Global Macro Research Report authored by Tushar Poddar and Vishal Vaibhaw.
The Goldman Sachs India Current Activity Indicator (CAI) increased to 5.6 per cent in May from 4.3 per cent in April and 4.4 per cent in the first quarter of this year.
CAI is an activity index that maps monthly and sequential real activity from 14 data indicators into one series. The key drivers of this improvement include industrial production, commercial vehicles sales, total traffic in ships, air cargo, visitor arrivals, and trade, the report said.
Despite the official May industrial production data coming in weaker than expected, there is still an improvement on a qoq basis, it added. According to Goldman Sachs, higher government spending is likely a key reason for the recent pick-up in domestic demand.
"After the sharp contraction seen in Q1 2015, government spending increased in April-May at the start of the new fiscal year, with the share of spending at 14.8 per cent of total budgeted spending for FY16, higher than the average of the past five years of 13 per cent," Goldman Sachs said.
It further noted that "significantly higher collections of fuel taxes can help fund the increase of government spending on capex".
Meanwhile, though trade data remain weak, Goldman Sachs expects an improvement in this space as well, in line with a pick-up in global growth.
On policy rates, Goldman Sachs said the Reserve Bank is likely to stay on hold during the current financial year as various forward-looking indicators suggest some easing in financial conditions.
"Given the 75 bps of rate cuts already delivered and the gradual increase in GDP growth, we expect RBI to remain on hold through FY16," the report said.
RBI, in its last policy review on June 2, had cut the repo rate by 0.25 per cent for the third time this year to spur investment and growth, but hinted that there may not be any more cuts in the near term.
As per the report, consumption demand remains "tepid", though some positive signs are emerging from urban demand.
However, rural demand remains very weak as suggested by still low rural wage growth, weak sales of fast-moving consumer goods and sluggish two-wheeler sales.
"In light of the evidence from all the recently released data, we think that there will only be a gradual improvement in GDP growth to 7.6 per cent in FY16 from 7.3 per cent in FY15," Goldman Sachs added.