>INDIA ECONOMICS (MORGAN STANLEY)

General Elections Verdict – A Hope for A New Beginning

Strong political mandate to Congress Party led coalition: The 2009 general elections outcome announced over the weekend was the best outcome in terms of strength of the leading party’s tally since the 1991 elections. Indeed, this is the first time since the 1960s that any Prime Minister would return for second consecutive term in office.

Upside risk to our forecasts has materialized: In recent past research reports, we have been mentioning that upside or downside risk to our growth forecast will depend on the outcome of 2009 general elections. The seats tally of the Congress Party of over 200 was even higher than our optimistic case (upside risk case) of 170-180 seats.

Government policy response likely to be stronger: Some of the key areas where we expect progress are (a) the government’s effort to improve public finances; (b) acceleration in infrastructure spending; (c) augmentation of government resources through privatization; (d) improvement in share of stable capital inflows and (e) implementation of some of the long pending deregulation measures for the pension funds, banking and retail sector.

Upgrading our growth forecasts: We now expect F2010 GDP growth to be at 5.8% compared with our previous 4.4% estimate. Similarly, we are also increasing our forecast for F2011 GDP growth to 6.8% from 6.2%. We are assuming higher private consumption and infrastructure spending and slightly higher trough for the private corporate capex.

Risks to our new base case estimates: We believe that any variation in global growth will influence India’s outlook via its impact on capital inflows in the country, and external demand. Based on G7 bull-bear case estimates, we see bull scenario growth for India at 6.8% in F2010 and 7.8% in F2011 and bear case at 4.7% in F2010 and 6% in F2011.

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