With just few days left for the lok Sabha elections, Morgan Stanley is expecting the economic fundamentals of the country to bounce back on the growth track towards the end of 2014. In a research report, America- based financial services firm pointed out that the future of the Indian economy looks bright if a stable Government comes to power.
In its research report on the Asia excluding Japan (AXJ) region economies, Morgan Stanley raised its forecast on the country's gross domestic product (GDP) and also pointed out that the consumer price index (CPI) inflation would ease further down.
The report said, "For AXJ, we maintain our GDP growth forecast of 6.0 per cent for 2014. This is down slightly from the 6.1per cent growth rate registered in 2013. We have, however, cut Thailand's 2014 estimated GDP growth to 3 per cent from 4 per cent, while fine-tuning India's GDP growth to 5.2 per cent from 5.1 per cent."
Further more, the report further added that for the year 2015, Indian GDP is expected to grow to 6 per cent, hinting signs of overall reversal in the country's economy. On the CPI inflation front, report said, "We expect inflation to decelerate over the next 12 months but due to still high government spending and high growth in rural as well as urban wage, the moderation will be gradual."
As per recent data, CPI inflation has eased to 8.1 per cent in February, while wholesale price index decelerated to 4.68 per cent for the same month. Morgan Stanly expects this trend to continue and has reduced its CPI inflation forecast of the country to 7.6 per cent for 2014 and 6.9 per cent in 2015.
Unlike the GDP and CPI inflation forecast, Morgan Stanley maintain a neutral view towards the on going high interest rate regime. The firm expects the average policy rate to stay at 8 per cent during 2014 followed by a marginal 25 basis points reduction to 7.75 per cent during 2015.
On the current account deficit (CAD) front, 2013 saw sharp decline in the country's deficit. CAD has narrowed substantially from 6.5 per cent of GDP in quarter ending December 2012 to just 0.9 per cent of GDP in by the end of December 2013.
Commenting on the commendable reduction in the CAD, report said, "A part of this improvement in the CAD reflects the decline in gold imports due to quantitative controls." Also after adjusting for net gold imports, CAD has improved from a deficit of 2.9 per cent of GDP in quarter ending December 2012 to a surplus of 0.1 per cent of GDP by the end of December 2013, report added.
Going ahead, the report stresses that everything now lays on the outcome of the general elections as no major policy actions are expect for the next three months. "We believe the new Government would need to accelerate the pace of structural policy reforms that improve the productivity dynamic," the report stressed.
Expressing concerns on the rising non performing assets (NPA) in the country's banking system, Morgan Stanley urges Government to take strict and immediate action. As per the data provided in the report, gross NPAs along with restructured loans ratio has increased to 10.2 per cent as of September 2013 as compared to 3.4 per cent during 2008.
"We believe that the government would need to recapitalize the banking system and clean up public sector banks' balance sheet due to the high levels of impaired loans in the banking system," the financial services firm added in its report.