How will reforms change GDP outlook: Morgan Stanley views

Brokerage house Morgan Stanley has retained its GDP growth forecast for the economy, but tweaked the probability of each of its assumptions, following the key policy decisions announced by the government on Thursday and Friday. These include hiking diesel price and approving foreign direct investment in retail and aviation .

Morgan Stanley now sees a 70% probability to its base case estimate of 5.1% growth compared to a 50% probability earlier. The brokerage sees a 15% probability to its bear case estimate of 4.3% growth (35% earlier), and a 15% probability (unchanged) to its bull case estimate of 6.8%.

"We think the recent set of measures announced will help prevent "deeper macro stress", but we believe there is a need for persistent policy action to revive growth meaningfully," Morgan Stanley economists Chetan Ahya and Upasana Chachra wrote in their note on Sunday.

Following are the four factors that have influenced Morgan Stanley’s forecast:
* Below-normal rains, affecting the farm sector outlook
* Relatively high fiscal deficit, continued strong growth in rural wages
* Private investment recovery still going to be slow
* Weak external demand

And this is what the government should be doing on a priority basis, according to Ahya and Chachra, to reduce fiscal deficit and revive the investment climate.

* Strengthen institutional capacity to allocate critical national    resources such as land and minerals to the private corporate sector in a transparent manner
* Enact the Goods and Services Tax Act (GST) value-added tax.
* Strengthen institutional capacity to manage the awarding of major infrastructure projects through public-private route.
* Build a comprehensive plan for energy security along with a systematic program for energy pricing reform
* Initiate fiscal consolidation that aims to reduce the national government deficit and improve the mix of its expenditure towards development spending.
* Initiate policy measures to boost the productivity of the rural workforce and manage rural wages growth to a more moderate level.
* Identify and fast-track 25-30 large infrastructure and core industrial projects.