India’s growth recovery broadens out on public capex and FDI inflows

In the past two years, there has been a steady improvement in India’s domestic macro environment. There has been a gradual rebound in the economic growth led by public capex and FDI inflows, noted Morgan Stanley in a research report. Incoming macro indicators, since QE Mar-16, have been indicating broadening out in recovery, driven by rebound in consumption expenditure. The growth in consumption expenditure is quite significant as it has been weak since mid-2012.

“We are revising up our growth estimates in 2016 to 7.7 percent Y from 7.5 percent Y and in 2017 to 7.8 percent Y from 7.7 percent Y”, added Morgan Stanley.

The upward revision is because of better-than expected QE Mar-16 GDP figures and upbeat incoming macro data. This showed broadening out of the growth rebound. The upwardly revision in the base case is restricted by the likely effect of the Brexit vote on global growth, leading to subdued external demand.

A rebound in broad market revenue growth, an increase in discretionary consumption, recovery in rural demand and a rise in steel and cement demand indicate a pick-up in India’s growth recovery. However, subdued private capex and external demand continue to be the main impediments to growth. 

Deceleration in foreign currency, leading to low manufacturing capacity utilization; higher real rates for leveraged corporate sector, low corporate pricing power and a weak balance sheet of the banking sector are holding back recovery in private capex, stated Morgan Stanley.

“We believe that, given the increased global uncertainties with the UK’s exit from the EU and excess capacity currently present, private capex will take 12-18 months to recover”, added Morgan Stanley.

The Brexit vote is expected to have a negative effect on India’s economic growth via financial channels and trade. But the impact is likely to be lesser on India than other nations in the region because of lower exposure in terms of exports to the UK, according to Morgan Stanley. Improved macro stability conditions are anticipated to curb possible effect via financial channels.