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Inflation | Consumption recovery to improve from early 2022: Morgan Stanley

Inflation | Consumption recovery to improve from early 2022: Morgan Stanley

A recovery in consumption and exports over the coming quarters coupled with policy measures such as lower corporate tax rates, labour reforms, Production Linked Incentive (PLI) schemes and companies looking to persify incremental production are likely to help improve private capex growth in the next 12-15 months, Morgan Stanley Research said on Monday. With vaccination rates fast picking up pace, the investment bank said that it expects consumption recovery to improve from early 2022.

The financial services firm said that government capex spending has gathered pace, private projects under implementation are improving while new investments in manufacturing sector continue to grow at a double-digit pace.

“We believe a pickup in demand coupled with policy measures will help improve the private capex outlook,” it said in a report on Monday, adding that for a sustained growth recovery, a pickup in capex is critical.

High frequency domestic growth indicators have improved quickly post the second wave and early signs of recovery broadening with improvement in service-related indicators, according to the report.

“Indeed, gross domestic product recovery has been led by a pickup in exports and capex as the consumption recovery has lagged due to periodic disruptions,” it said.

It said that overall projects under implementation (as compiled by CMIE) have slowed in the quarter ended September 30, 2021 but private projects under implementation have picked up pace while new investment announcements slowed.

“In addition, the approval of PLI scheme for all 13 sectors augurs well for manufacturing sector outlook,” it said, adding that foreign direct investment (FDI) flows remain robust tracking at 3.3% of GDP on a 12-month trailing basis.

As per the report, centre’s capex spending has remained robust and state capex trend has also started to improve since March and investment activity is gradually gaining momentum.

“This bodes well for capacity utilization, which has improved to 69.4 in the quarter ended March, 2021 from the trough of 47.3 in the quarter ended June, 2020,” it said.

As per Morgan Stanley, a favourable environment with negative real rates and improvement in corporate revenue growth bodes well for improvement in balance sheet positions.

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