Morgan Stanley predicts India's GDP to hit 6% in 2014

But macro stability risks still linger.

Morgan Stanley has reduced its GDP growth forecast for F2014 to 6% from 6.2% earlier to reflect the lower-than-expected GDP growth in QE Dec-12 and the still-challenging domestic and external environments. 

Here's more from Morgan Stanley:

While GDP growth bottomed out in QE Dec-12 and will gradually pick up from here, we now expect the recovery to be stretched out marginally as compared to our earlier expectations.

We believe that an improvement in agriculture GDP growth (low base in 2012), a slight pick up in export growth that also supports manufacturing and trade services, and stabilization of private capex at low levels will help to improve overall GDP growth in F2014.

We believe that since the credit crisis, the economy has been afflicted by the illness of a weak macro trend because of continued high fiscal deficit and low investment spending (what we characterize as bad growth mix).

While running a high fiscal deficit for a short period of a year or so post the credit crisis to support growth confidence was justified, in our view, continuing with it for four years in a row has left the economy in an unhealthy state.

We believe that this bad growth mix is at the heart of the problems facing the economy, leading to macro stability risks and slower growth. 

As we have been highlighting, we believe that the remedy to this illness lies in administering a double dose of medicine – i.e., fiscal consolidation and simultaneous efforts to revive private capex.

Since Sep-12, the government has taken clear steps to alleviate the bad growth mix that has led to early signs of a reversal in the stagflation-type environment.

Fiscal consolidation – the first dose of the bitter medicine – is being delivered and the government will likely stay the course going into F2014. For F2013, we estimate the government will likely achieve a fiscal deficit of 5.4% of GDP (the government’s revised target is of 5.2% of GDP). This is a major change compared to our tracking estimate of 6.1% of GDP back in Sep-12.

The government has achieved this with an aggressive reduction in expenditure growth. Similarly, for F2014, the government is likely to stay on the course of fiscal consolidation, cutting the deficit further by 0.4% of GDP. 

National fiscal deficit will reduce from 8.2% in F2012 to 7.5% in F2013 and further to 7% in F2014.