General elections outcome in May is critical to improvement in growth mix, which includes, increasing capex and lowering fiscal deficit, says Morgan Stanley in a research note
The outcome of general elections in May 2014 will be critical to determining the pace of recovery in India, says Morgan Stanley. Considering the constraints facing domestic demand, the strength of the overall growth improvement will depend largely on improvement in exports in the near term and measures to boost productivity in the medium term, it says in a research note.
“A meaningful recovery in private capital expenditure (capex), government spending or private consumption will be difficult to achieve over the next six to twelve months in the Indian economy, while policy makers focus on improving macro stability indicators, such as inflation, the current account deficit, and banking sector balance sheets. Industrial companies will also need to de-lever their balance sheets (average debt equity ratio of industrial companies is at 2:1),” the note added.
Morgan Stanley observes that in terms of government policy post-elections steps must be taken towards: (a) fiscal consolidation for sustained improvement in macro stability; (b) moderating rural wage growth to be in line with the productivity trend; (c) improving the investment outlook by reducing regulatory hurdles, and (d) cleaning up public sector banks' balance sheets and infusing capital.
In the context of CPI inflation remaining above 8% in the near term, Morgan Stanley expects Reserve Bank of India (RBI) to keep policy rates on hold at the next monetary policy meeting. Seasonally favourable factors in 1H FY2015 would help to improve liquidity conditions and result in some easing in short- term market rates.
Morgan Stanley expects the full-year F2014 current account deficit to narrow to 1.7% of GDP (vs. 4.8% of GDP in F2013) and further to 1.6% of GDP in F2015.
For financial stability, there is a need for adjustment in underlying deposit growth for sustained improvement in credit deposit ratio. While deposits have been growing at a faster pace than credit recently, underlying deposit growth adjusted for Non- Resident Indian (NRI) deposits is still slower than credit growth, indicating that the underlying adjustment process of lifting deposit growth above credit growth is still not complete. Morgan Stanley believes that as CPI (consumer price index) inflation moderates and real rates build up gradually, they will help to improve deposit growth, which is required to correct the persistent gap between credit and deposit growth.
Morgan Stanley’s snapshot on macroeconomic forecasts is given in the table below:
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