NEW DELHI: A weak coalition government in 2024 moving away from supply-side reforms could pose a key risk to India’s growth stability along with oil prices inching up to $110 per barrel, said a Morgan Stanley report. “The key risk would be the emergence of a weak coalition government, which could result into a pivot back towards redistributive policies at the expense of the focus on boosting capex and implementing supply-side reforms,” it said.
Morgan Stanley researchers said India would be able to manage risks from oil prices increasing to $95 per barrel but cautioned that $110 per barrel could make the situation difficult for the country.
Crude oil price increased to $90.02 per barrel in October, according to government data. An increase of another $20 per barrel could upset the inflation and fiscal deficit calculations, according to the report.
“Under this scenario, while there would still be some fiscal subsidisation, we believe that the passthrough to domestic fuel prices will increase. As adjustments to retail fuel prices are taken up, there will be upward pressures on inflation,” said the report.
It highlighted that the current account deficit could widen to 2.5%, close to RBI’s comfort zone. “With macro stability indicators stretched under this scenario, we think currency depreciation pressures could rise and lead RBI to restart its rate hike cycle,” said the report. However, if conditions remain favourable, India’s growth could average 6.5% for the decade, according to Morgan Stanley. It said growth could move higher if the government makes more concerted efforts to expand infrastructure.
The report said the government needs to do more to address infrastructure and skilled labour bottlenecks that will emerge over the next 18-24 months. “The key imperative for India at the current stage of development is to focus on boosting private investment to reap the demographic dividend,” it said, pointing out that “the investment cycle has already inflected, driven initially by a sharp upturn in public capex. There are signs that private capex is picking up.”
