While the slow pace of recovery in India’s economic growth is somewhat similar to the slowdown witnessed during 1998-2002, global financial services firm Morgan Stanley said that an increase in public
While the slow pace of recovery in India’s economic growth is somewhat similar to the slowdown witnessed during 1998-2002, global financial services firm Morgan Stanley said that an increase in public expenditure and a sharp rise in foreign direct investment (FDI) would help India offset the weak private investment climate and register a better growth.
During 1998-2002, global and domestic factors kept capex (private as well public) weak, which resulted in a slow pace of growth recovery and led to the current account moving to a surplus of 0.7 per cent of GDP in FY 2002 (for the first time in 25 years).
“While we are already witnessing a trend similar to that of 1998-2002 in terms of private capex weakness, we believe the two factors that are different in this cycle are strong improvement in public capex and foreign direct investment. With the government’s continued efforts to accelerate public investment and encourage foreign direct investment, we expect investment growth to be better than it was in the 1998-02 cycle. Moreover, we also expect private consumption recovery to be stronger than it was in the previous cycle. Hence, we expect overall growth recovery to be better than the 1998-02 cycle even as it remains slow relative to the 2004-07 cycle,” Morgan Stanley said.
Given the prolonged weakness in external demand conditions in both cycles, Morgan Stanley believes that a growth recovery requires a meaningful pick up in domestic demand. According to it, the improvement in private consumption and public investment is likely to boost the domestic demand environment.
“Consumption growth was marked by mini cycles of recovery post the Asian Financial Crisis and post-the dot-com bubble. However, in the current cycle private consumption is showing signs of gradual recovery. It will be further supported by higher wage payouts to government employees post implementation of the seventh pay commission and pickup in job growth,” it added.
In its recent Budget, the Central government has earmarked huge investments in rural economy and infrastructure to boost the growth.
While the investment in agriculture and its allied sectors is expected to boost rural economy, which got impacted by drought, public spending in infrastructure will have a ripple-effect on the industrial growth.
