India is on the cusp of an investment boom, says Nomura's Rob Subbaraman

India’s GDP growth for the third quarter was at 8.4% with investments doing much of the heavy lifting with a growth of 10.6%. Rob Subbaraman, Head-Global Macro Research at Nomura believes India is on a cusp of an investment boom and if that continues the country can sustain a 7% to 8% GDP growth in the coming years with low inflation.

In an interaction with CNBC-TV18, Subbaraman said, “That's very much what an emerging economy needs if you get strong investment, because India really needs to develop its infrastructure hard and soft. And I think if you can have successive years of strong investment, that creates capacity, and allows you to keep inflation low, and raise your potential growth."

While the GDP growth has been solid, the gross value added (GVA)--calculated as the GDP plus indirect taxes minus the subsidies--was in line with expectations at 6.5%. While this could mean either a sharp increase in indirect tax collections or a significant drop in subsidies year-on-year (YoY). The net indirect taxes for the quarter have risen 32%. But analysts estimate that lower subsidies had a greater implication on the overall GDP numbers.

Subbaraman said that while there's been a lot of discussion about indirect taxes and value-added GDP growth (GVA) being a bit weaker than the headline number, it should be noted that even at 6.5%, India would by far be the fastest growing economy among all the major economies around the world.

Discussing the implications of the consumption growth lagging investment growth for the fifth consecutive quarter, Subbaraman said his base case is that consumption is slower partly because of the higher cost of living in India in the recent years.  He believes the strong capital expenditure (capex) will create demand for labour, in turn, boosting consumption. Continued investments will also narrow the gap between the very strong public capex and private consumption, he noted.

He also highlighted the positive trends in foreign direct investment (FDI) and the healthy state of corporate balance sheets, indicating a favorable environment for economic development.

“Hopefully, as interest rates come down this year, as we see stronger foreign direct investment into India, and with fairly healthy corporate balance sheets, we will start to see private investment after the election picking up strongly. I think that's the important ingredient needed to join the public investment and if that happens for a couple of years, I will get more confident that India's potential growth is going to be an upward trend.”

Subbaraman also noted a gradual easing of the inflation worries forecasting an easing off in the cost of living pressures if the country continues to get strong investment.