Mumbai: With both real interest rate in the positive arena and inflation under check, private consumption is set to pick up strongly, leading to a better overall growth, which will be better than the 1998-2002 recovery cycle, says leading Wall Street brokerage Morgan Stanley.
The report penciled by Chetan Ahya of Morgan Stanley India compares both macro as well as the micro parameters during the 1998-2002 cycle and the present downturn cycle that began in 2013, which according to him, are very similar.
“We expect private consumption recovery to be stronger than it was in the previous cycle of 1998-02. Hence, we expect the overall growth recovery to be better than the past cycle even as it remains slow relative to the 2004-07 period,” said Ahya in a report ‘Macro indicators chart-book: Reminiscent of the 1998-2002 cycle?’
Generally, real interest rate can be described as nominal interest rate minus the inflation rate.
More positively, Ahya noted that domestic demand revival in the current cycle by private consumption and public capex is forthcoming, which was absent in the 1998-02 cycle.
And accordingly, the report expects private consumption to gather more speed with higher wages to government employees after the 7th Pay Commission implementation and new job creation.
Reeling out comparable data between 1998-2002 and the 2013-2016 cycle, Ahya notes that in 1998-02, global and domestic factors kept both private as well public capex weak, leading to slow growth and the resultant CAD surplus in 25 years at 0.7 per cent of GDP in FY02.
He said the economy is already witnessing a trend similar to that of 1998-02 in terms of private capex weakness, with the only two factors that are different in the present cycle — strong public capex and higher FDI inflows.
Gross FDI inflows continue to pick up, increasing to an all-time high of dollar 55 billion or 2.7 per cent of GDP as of December 2015, and on the fiscal deficit front, he says on a 12-month trailing basis continues to track below target at 3.4 per cent of GDP as of Q3 of the current fiscal against the 3.9 per cent target for FY16.
On the macro side, consolidated fiscal deficit is likely to improve to 5.8 per cent of GDP in FY17, (3.5 per cent for the Centre and 2.3 per cent for the states) from 5.9 per cent in FY16. But this is a massive improvement from 6.5 per cent from FY15 and 7 per cent in FY14 and 6.9 per cent in FY13, the report said.
Consolidated deficit came down to 6.5 per cent in FY15 from a peak of 9.9 per cent in FY09, through expenditure control, it added.
On pricing parameters, he noted that WPI remains in a deflation mode for the 16th consecutive month in February while non-food WPI too continues to contract with the latest print coming in at 5.4 per cent.
This continuing decline in inflation data-print has ensured that the real interest entering the positive territory since January 2014.
He, however, noted that present cycle is despite a strong political mandate in the May 2014 hustings that raised quicker recovery hopes.
“But, the recovery has all along been frustratingly slow even though the macro stability environment has improved and government policy action too has been moving along the right path,” Ahya said.
“In our view, the prolonged weakness in the external environment is a key contributor to the slow pace of recovery. Indeed, exports account for 20.5 per cent of GDP and not only
act as an important source of end demand but also have a bearing on domestic capex growth.”
On price stability, he says both the cycles saw a sustained fall in inflation. While CPI inflation declined from 13.2 per cent in 1998 to 4.3 per cent 2002, and fell from a peak of 11.5 per cent in 2013 to 4.9 per cent in 2015.
On external stability, the strength of the external balance-sheet improved in both cycles. While CAD narrowed from 1.7 per cent of GDP in 1998 to a surplus of 1.4 per cent of GDP in 2002, the same after peaking at 6.5 per cent in 2012, narrowed to 1.3 per cent in December, 2015.
But one of the biggest negatives is the high corporate debt in the present cycle. On the contrary, the past cycle saw a considerable build-up of public debt, but the same is declining in the current cycle.
External debt is projected to marginally rise to USD 516 billion or 24.7 per cent of the GDP by FY17 from 23.7 per cent or USD 488 billion by FY16. In FY13, it was USD 394 billion or 21.5 per cent, USD 427 billion or 22.9 per cent in FY14, and USD 459 billion or 22.4 per cent of GDP.