UP elections won't dictate policies: Morgan Stanley

Even though the outcome of the UP elections have taken a toll on the markets, which keep swinging lower as SP lunges toward a majority win, Chetan Ahya, India and South East Asian Economist at Morgan Stanley feels investors are focusing way to much on the elections.

In an interview with CNBC-TV18, Arya says UP elections will not hamper the ability of the government to execute economic policies.

He said at present there were two things that needed immediate attention- fixing of the fiscal situation and improving savings so that it can flow into investment.

He said India doesn’t need a stronger Congress to solve the fiscal situation or clear up infrastructure bottlenecks.

Talking about the fiscal mismatch, he said that subsidy burden is the reason for the high fiscal deficit in the country. If the government is to clamp down on the subsidies, there might be an immediate stoke to inflation.

Morgan Stanley’s estimates the government’s fiscal deficit target at 4.9 percent for 2013, while this year the number could end up between 5.8 and 6 percent. Ahya added that private expenditure needs to contribute more to the GDP growth and bring down the contribution of the public expenditure. In that case growth can recover beyond 7 percent levels in financial year 2014.

On the monetary side, the RBI meeting on March 15 is just a day ahead of the Budget. Ahya says another CRR cut of 50 bps is evident now. The rupee has already crossed the 50 mark against the dollar. But any rate cut on that day is not possible. If crude remains stubborn, any rate cut even in April will not be possible.

Morgan Stanley, however, is not confident of the rupee getting stronger. The current account deficit always haunts the exchange rates coupled with no assurance of capital flows. And there is a downside risk that the rupee could even touch 52.5 against the dollar before it recovers.

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