India is expected to register a gradual recovery in the growth rate to 6.1% in 2013, driven by positive impact from policy actions and acceleration in farm output growth, says a report by Morgan Stanley.
The country's growth rate would witness gradual recovery considering the "challenging" environment due to high fiscal deficit, high rural wage growth and declining private investments amid a still lacklustre external demand, the report said. “We, thus, expect only a gradual recovery in growth to 6.1% in 2013 from 5% in 2012, driven by some positive impact from policy actions by the government and acceleration in farm output growth from a low base," the report said.
Morgan Stanley said that the bad growth mix of high fiscal deficit, high rural wage growth and declining private investment needs to be addressed to revive growth in a sustainable manner. Moreover, managing macro stability indicators, such as inflation and the current account deficit, will be difficult, unless the government initiates a reduction in its expenditure growth and brings rural wage growth lower.
“While we are positive that the government will continue with more measures to support improvement in investment, we are less confident that the government will be able to achieve a meaningful reduction in the fiscal deficit via expenditure control and/or cut rural wage growth in the year before the general elections," the report added.
The government's recent reforms include allowing FDI in multi-brand retail, aviation and broadcasting, hiking diesel price, capping the number of subsidised LPG cylinders, opening up pension sector to foreign investment and raising the FDI cap in insurance to 49%.
India had been growing around 8-9% before the global financial meltdown of 2008. The growth rate in 2011-12 slipped to a nine-year low of 6.5% and in the quarter ended June 30, 2012, the economy grew 5.5%.
The government expects the economy to expand by 5.5-6% this fiscal.
According to Morgan Stanley, policy reforms is the key anchor to correct the "bad growth mix". If the government aggressively implements policy reforms and kick-starts large Greenfield projects and takes steps towards expenditure control, growth rate could see a significant uptrend.