NEW DELHI:Global financial services firm Morgan Stanley has forecast a 7.5 per cent real GDP growth for the Indian economy for 2018. The recent plan to recapitalise Indian public-sector banks combined with the returning health of balance sheet fundamentals are set to be the primary drivers of the growth spurt.
The firm made the forecasts in a research note published this week, stating that both corporate returns expectations and balance sheet fundamentals are improving. In tandem with the positive effects of a strengthened financial system, the developments set “the stage for a fully fledged recovery in 2018, and we expect real GDP growth to accelerate from 6.4 per cent in 2017 to 7.5 per cent in 2018 and further to 7.7 per cent in 2019”.
While recoveries in corporate balance sheet fundamentals were expected with the effects of demonetisation and the GST rollout beginning to fade, the real game changer could well be the Rs 2.11 lakh crore recapitalisation plan announced by the government.
“The plan would remove the potential tail risk of the banking system posing a drag on growth, improve the headroom for growth and boost investors’ and domestic corporate sentiment... This should help to cement the growth acceleration and capex recovery that we were expecting,” the note said.
Private capital spending is also expected to begin recovering as demand turns around. This, in turn, should lead to an improvement in corporate revenues, the firm pointed out.
However, the cyclical recovery in growth is also expected to increase inflationary pressures, with the report saying that normalising food prices should drive a pick-up in headline inflation. “Against the backdrop of better macro outlook, we expect the RBI to hike in the second half of fiscal 2019,” it noted.
The RBI’s latest bi-monthly review saw the central bank maintain the status quo on rates, with concerns on firming inflation one of the factors influencing the decision.