Factors such as improving employment prospects, conducive investment prospects, rising export orders, continuation of reform stimulus suggest the economic recovery is sustainable and the growth driver during next financial year will shift from government stimulus to private demand, said Nomura in its latest research on Indian economy.

After more than six months of positive economic data, there are still concerns about the sustainability of this recovery. Many believe that inventory restocking and fiscal stimulus are the primary reasons for the positive economic data and that their effects will soon fade. While this is indeed true, it is also believed that the fundamental drivers of domestic demand are moving into place, suggesting that the growth driver in FY11 (year starting April 2010) will shift from government stimulus to private demand.

It is expected that the spurt in industrial activity will gradually boost growth in the services sector by next year. GDP growth at about 8% is expected in FY11, the Nomura research pointed out.

High-frequency data show the economy gaining traction. Many data have posted significant year-on-year growth: industrial production hit 9.1% in third quarter of 2009 against 4.7% in the same quarter of 2008; the airline passenger load factor was 19.3% in third quarter of 2009 versus -9.7% in the same quarter last year; tourist earnings was 9.3% in third quarter of 2009 versus 8.5% in the same quarter last year; and railway revenue earning freight traffic was 11.1% in third quarter of 2009 over a hefty 16.4% base in the same quarter last year.

Rising incomes and stable employment boost consumer demand. Different surveys indicate employment prospects are improving. The Reserve Bank of India?s survey on employment in the industrial sector showed an increase in expectations to 8.8% growth in fourth quarter of 2009 after a sharp fall in the first half of the year. All sectors except textiles reported higher employment expectations for Q409. Similarly, the employment index of the manufacturing PMI in October and Dun & Bradstreet?s (D&B) business expectations survey both showed better employment prospects in Q409.

It has been long believed that sustainable consumption growth is a precondition for higher investment. The capital goods component of the industrial production index rose by 8.1% y-o-y in Q309 from a low of 2% in the second quarter, suggesting that investments bottomed out in the previous quarter. Availability of financing has also improved. As noted by the RBI, weak credit has been partially offset by an increase in other sources of funding such as equity, commercial paper, external commercial borrowings and foreign direct investment.

External demand is likely to remain subdued for a prolonged period, but there are signs that the contraction in export demand has come to an end. As estimated, seasonally adjusted exports rose 1% month-on-month in September, the fifth consecutive monthly increase. The rise in the export order index of the manufacturing PMI also points to increasing foreign demand, albeit at levels still below the longer-term trend.

Rising consumption, higher investment, higher capital inflows, asset price inflation and a rising wealth effect can all lead to positive feedback loops and strengthen domestic demand.