2018 likely to be first year of private capex recovery

It will revive job creation thus ensuring the economy heads towards the ‘productive growth’ phase, according to a report by Morgan Stanley

A recovery in private capital spending is likely next year as balance sheet fundamentals of corporates are improving amid strengthening financial system, acording to a report. Accordingly, India’s gross domestic product (GDP) growth will accelerate to 7.5 per cent in the 2019 financial year, the report by global financial services major Morgan Stanley said.

The report highlighted that 2018 is expected to be the first year of fullfledged recovery for India as it will be marked by a synchronous recovery in domestic as well as external demand, and, a pickup in private capex for the first time in six years.

As per Morgan Stanley's discussions with investors, after six years of continued deterioration in private capital spending, investors are "more skeptical" of a turnaround in private capex, but the global brokerage sees three factors which will help revive private corporate capex.

First, corporate return expectations are rising, second corporate balance sheet fundamentals are improving and third, the financial system is strengthening, and it will be able to meet investment credit demand, it 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 capital expenditure (capex) recovery in 2018, thereby raising our confidence that India will be on a sustained growth cycle in the coming years," the firm noted.

Overall, with productivity growth being supported by a pickup in private capex, Morgan Stanley expects real GDP growth to accelerate from 6.4 per cent this year to 7.5 per cent in 2018 and further to 7.7 per cent in 2019. "On a fiscal year basis, GDP growth should accelerate from 6.7 per cent in financial year 2018 to 7.5 per cent in fiscal 2018-19 and further to 7.7 per cent in 2019-20," the firm said in a research note.

As private capital expenditure recovers, it will revive job creation, thus ensuring that the economy will be heading towards the "productive growth" phase.

A productive growth phase is characterised as a period of improving growth while macro stability remains in check – typically setting the stage for a sustained growth cycle, the report noted.