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 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 1998-2002. 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 noted 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 today 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 $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 3.9 per cent target for FY’16.
On the macro side, consolidated fiscal deficit is likely to improve to 5.8 per cent of GDP in FY’17, (3.5 per cent for the Centre and 2.3 per cent for the states) from 5.9 per cent in FY’16. But this is a massive improvement from 6.5 per cent from FY’15 and 7 per cent in FY’14 and 6.9 per cent in FY’13, the report said.