Morgan Stanley blames misguided policy mix for dip in growth
Global investment bank Morgan Stanley today blamed a misguided policy approach focused on consumption for the steep fall in the growth momentum, while scaling down its FY13 growth forecast to 5.8 percent, the lowest estimate so far.
The New York-headquartered bank has cut its growth forecast from the earlier 6.3 percent for the current fiscal citing a "bad growth mix".
Explaining the 'bad growth mix', bank's chief economist for Asia Pacific Chetan Ahya said the much-talked about consumption story is being supported by a high fiscal deficit, while elevated rates have resulted in a decline in private investments, which is "not sustainable".
Official data released last week pointed to the March quarter growth slowing down to the lowest in nine years at 5.3 percent and the full fiscal growth slipping to 6.5 percent.
However, a day after the FY12 growth numbers were out, Ahya had revised downwards the forecast for the fiscal to 5.7 percent, blaming it to 'a stagflation type environment', but today he clarified that it was for calendar 2012 and not for the fiscal.
It was not just Morgan Stanley, but many leading global banks such as Goldman Sachs, StanChart, Citi, HSBC, and brokerages like CLSA and the domestic agency Crisil too brought down their growth forecasts for the country.
Morgan Stanley expects the Reserve Bank to cut rates by a further one percent till March 2013 to support growth.
Ahya said the RBI move in April is yet to result in the real cost of borrowings coming down due to a variety of reasons and pointed out that a reduction in cost of capital will alone spur growth.
He argued that the high growth phase between 2003 and 2007, which saw the economy growing at over 9 percent annually, was made possible only because it was private investment-led, unlike the consumption-led growth which the country is relying on right now.
In FY14, Ahya said improvement in the overall global macroeconomic situation will lead to the domestic growth improving to 6.6 percent.
On the currency front, where a sharp depreciation of over 23 percent in the rupee over the last 12 months has made it the worst performing Asian currency, Ahya said the rupee will continue to trade around 56 to a dollar in the near-term and appreciate to Rs 52 by the year-end.
All the currencies in the emerging markets, which are suffering at present, will see sharp appreciation in the medium-term due to factors like an expected third round of quantitative easing in the US, he said.
On the crucial issue of fund inflows, a fall in which has led to the rupee getting battered, Ahya avoided a direct answer saying they are a play of global issues and not domestic ones.
He, however, said the much sought-after foreign direct investment flows will be lower in the current fiscal than the year ago, when the country recorded a record USD 51 billion in foreign fund inflows.