Expansion cycle soon, predicts Morgan Stanley

Moneylife Digital Team 04 September 2015

According to Morgan Stanley, India is one of the few EM economies that has already undergone a period of adjustment to improve its macro stability and is making steadfast progress towards improving the growth mix and productivity

India's gross domestic product (GDP) growth is likely to accelerate gradually and inflation to remain below 5% over the next two years. According to Morgan Stanley, this will be a longer duration expansion cycle for India with low risks of overheating in the next two years considering the overall policy approach of government and Reserve Bank of India (RBI).

Morgan Stanley, in a research note said, "India is one of the few EM economies that has already undergone a period of adjustment to improve its macro stability and is making steadfast progress towards improving the growth mix and productivity dynamic. In our view, India stands out as EM growth is likely to be below its 30-year average and a large number of EM economies are still in adjustment phase. India is also one of the few Asian economies that is not facing a high level of debt and demographics issues."

Revising India's growth estimates marginally to 7.5% for FY2016 from 7.9% earlier and 8.1% for FY2017 from 8.4% earlier, the report says it is in line with the growth trajectory due to bad weather and weak external environment. "Growth trend is showing initial signs of recovery with pick up in capex and discretionary consumer spending. However, the continued weakness in external demand and slowdown in rural consumption spending with cuts in the government’s redistribution policies are holding back the pace of recovery. Moreover, the recent weakness in rainfall trends has raised concerns on agriculture output growth, with related repercussions for rural consumption," Morgan Stanley said.

According to the report, over the last three years, India has been taking up macro adjustment policies to improve macro stability and the productivity environment in a sustainable manner. It says, "Policymakers pursued tight fiscal as well as monetary policies. In past cycles, India has had the advantage of managing these adjustment cycles better with support of exports (like in 1998-99 and 2003-04), which helped it to step out of the adjustment phase faster. Hence, we believe that the growth recovery will be slow and largely premised on domestic demand."

Morgan Stanley expects India's GDP growth recovery to be driven by a pickup in capex, more public than private, urban consumption and stabilization of exports i.e. not continuing to contract. However, the pace of policy actions to revive productivity dynamic, strength of external demand recovery and trend in capital inflows into emerging markets are the factors that will influence the growth outlook, Morgan Stanley warned.

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