Private capex likely to recover in 2018

Mumbai: Global financial service major Morgan Stanley expects private capex to recover in 2018, for the first time in six years as aggregate demand is improving with a synchronous recovery in consumption and exports, which is likely to lift capacity utilisation.

However, it believes that the headline inflation would also firm up alongside a recovery in growth which is likely to force the RBI to hike interest rate during the second half of FY18.

“With improving capacity utilisation and a narrowing of the output gap over time, the inflation trajectory will be on an upward path, and the upside risks should begin to build. The central bank will need to act to ensure that inflation expectations are anchored and that the actual inflation outcomes do not deviate too far from its 4 per cent target,” Morgan Stanley said.

With six years of continued deterioration in private capital spending, Morgan Stanley said the area where investors have the lowest level of conviction is with respect to a recovery in private capex.

“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. This should help lift capacity utilisation and corporate revenue growth and help improve corporate return expectations, paving the way for a recovery in private capex,” it added.

With the support of pay commission-related wage hikes and a gradual economic recovery supporting wage growth, consumption growth is likely to hold up going forward.

Another factor that would support a recovery in private capex is the ability of the financial system to extend credit.

The bank recapitalisation plan according to Morgan Stanley would remove the potential tail risk of the banking system posing a drag on growth, improve the headroom for growth and boost investors and corporate sentiments.

With a recovery in private capex, Morgan Stanley expects India’s GDP growth to accelerate from 6.7 per cent in FY18 to 7.5 per cent in FY19 and further to 7.7 per cent in FY20.