Morgan Stanley says private investment to recover next fiscal

Morgan Stanley says private investment to recover next fiscal

India News

The much awaited recovery in private investment will start in the next fiscal due to an improvement in demand, recovery in corporate balance sheets and ability of the banking sector to credit demand after the recapitalisation of state-owned banks, US investment bank Morgan Stanley (MS) said in a report on Tuesday.Co-authored by economists Derrick Kam and Chetan Ahya, the report titled ‘Three reasons why we expect a private capex recovery’ said that the stage is now set for a “full-fledged” recovery in India as macroeconomic fundamentals are improving.Private capex has been lagging in India for the last six years as companies have been reluctant to bet more money on improving demand. Currently government led public sector spending is higher than private spending in the country. But MS said things are about to turnaround led by companies.“Corporate return expectations are improving. Over the past few months, we have finally begun to have a period in which consumption and exports are recovering simultaneously. This is the first time in the past four years this has occurred. The synchronous recovery of consumption and exports should help lift capacity utilization and corporate revenue growth and help improve corporate return,” MS said.Corporate balance sheet fundamentals are improving as real interest rates will drop below the real GDP in India, companies have deleveraged with free cash on their books and credit ratings have improved.“First, at a macro level, the growth and interest rates dynamic should turn favourable. Second, corporate balance sheets have delevered over the past two years, and free cash flows are sitting at all-time highs at over 10% of sales – all of which should be supportive of a recovery in private capex. The credit ratio (indicating the number of ratings upgrades to downgrades) has improved to 1.9 times in the first half of this fiscal year from 1.2 times in F2017, indicating a further improvement in corporate balance sheets,” MS said.The strengthening of the financial system will also help increase flow of credit and support private investments as state-owned banks, which dominate the Indian banking sector will be in a better shape to lend.The insolvency and bankruptcy code, RBI enforced quicker resolutions of NPAs and the Rs 2.1 lakh crore recapitalisation plan for state-owned banks would “remove the potential tail risk of the banking system’s posing a drag on growth, improve the headroom for growth, and boost investors’ and domestic corporate sentiment,” MS said.“In sum, the combination of a recovery in end demand and easing of credit constraints should help to pave the way for a private capex recovery in 2018, thereby raising our confidence that India will be on a sustained growth cycle in the coming years.”The US based investment bank expects India’s GDP growth to accelerate to 7.5% in the fiscal year ended March 2019 and further to 7.7% in fiscal 2020, from 6.7% in the current fiscal ending March 2018.