Morgan Stanley today revised its growth forecast for India for 2016 to 7.5 per cent from 7.9 per cent previously and noted that the country's economy is expected to see tepid recovery largely owing to external factors.
According to the global financial services firm, though the domestic macro environment has been improving steadily in the last two years, the pace of growth recovery has been slower than anticipated, held back by external factors.
"We are revising down our growth estimate for 2016 to 7.5 per cent from 7.9 per cent previously and for 2017 to 7.7 per cent from 8.0 per cent," Morgan Stanley said in a research note.
Despite the downward revision, the global brokerage firm said it is still building in a slow recovery in growth driven by domestic factors.
"We expect the recovery in growth to be driven by domestic drivers, i.E; urban consumption and a revival in public capex. We expect the rise in foreign investment inflows to support the revival in capex further," the report noted.
The report said the country's macro stability conditions are likely to remain in check with a low chance of "overheating". As a result, we expect the current account deficit (CAD) and inflation to remain moderate, it said.
The slower than-anticipated pace of recovery so far has largely been due to weak external demand conditions, Morgan Stanley said.
Meanwhile, goods exports have been contracting (in value terms) over the last 14 months, with a broad-based decline in commodity and non commodity exports. Services exports have followed a similar trajectory, with growth slowing to 0.4 per cent in 2015 from 5.1 per cent in 2014.
Moreover, the recovery in private sector capex has been tepid, with a muted rise in projects under implementation (CMIE) in 2015.
"In our view, the weakness in private sector capex is due to weak external demand conditions, which in turn is resulting in low capacity utilisation levels, and commodity price-led PPI deflation, which is impacting corporate sector profitability adversely," it added.
