Pace of economic reforms depends on outcome of elections: Morgan Stanley

Mar 26 2014, 20:15 IST
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We are assuming that the election will produce a stable government: Morgan Stanley. PTI We are assuming that the election will produce a stable government: Morgan Stanley. PTI
SummaryWe are assuming that the election will produce a stable government: Morgan Stanley.

Global brokerage firm Morgan Stanley today said the pace of economic reforms depends on the outcome of general elections, which, it assumed, will throw up a stable government.

"We are assuming that the election will produce a stable government, which can then take up some of these reforms in a steady fashion, following formation of new government.

"This in turn would help put the economy back onto a firm footing and lay foundations for stronger growth ahead...It is in this context that we think the outcome of general elections in India will be the key to determining the pace at which these productivity-boosting reforms are implemented," it said.

Suggesting a five-pronged policy to bring back economy to 7-8 per cent GDP growth, it said pruning fiscal deficit, policy changes, improvement in business environment, rethink on urbanisation policy and removing rigidities in energy and mining sector are highly required.

In its report titled 'India Economics: Five Key Reforms to Fix India’s Growth Problem', it said: "We think the new government will need to implement these to move out of the current stagflation type environment and accelerate GDP growth in a sustainable manner towards 7-8 per cent.

India's fiscal deficit remains significantly higher even compared to the US, which was the epicentre of the credit crisis, it said.

"We believe that in the first stage there is a need to reduce expenditure to the tune of about 1 per cent of GDP."

In the second stage, with the growth recovery and improvement in tax revenues, expenditure growth needs to be maintained at a lower level to bring down fiscal deficit.

Improvement in business environment is required as policy uncertainty, corruption-related investigations, and regulatory hurdles have deteriorated business environment and held back investment cycle.

"...government has taken steps (such as liberalising FDI limits, setting up of Cabinet Committee on Investment), yet the overall business environment still remains challenging."

It said urbanisation policy need a rethink as focus on redistribution and development of rural areas has resulted in disincentivising urbanisation.

"In the last five years, the government’s policy to promote higher rural wages has directly worked against the urbanisation effort.

"To encourage urbanisation, we believe policy makers will need to focus on creating physical infrastructure in cities and ensuring better delivery of public services to citizens," Morgan Stanley said.

It said rigidities needs to be addressed to unleash growth in energy and mining sectors. Supply side bottlenecks, including approval process for environment and land acquisition and lack of rail linkages, have hampered energy and mining sectors.

"Addressing these structural bottlenecks would help India secure its energy requirements and boost its mineral exports, thereby removing a constraint on growth.

Our estimates show that the increase in coal imports and decline in iron ore exports likely added close to 0.8 per cent of GDP to India’s current account deficit between FY2005 and FY2014," the statement said.

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