Ridham Desai Picks A Certain Bet For India's Upcoming Growth Cycle

The central government through Budget 2022-23 has laid the foundation for private capex to pick up in the next 12 months, according to Ridham Desai.

"The government's strategy is very clear. Private investments need to be routed in and the centre will provide support for one more year until it gets private capex going," the managing director of Morgan Stanley India told BloombergQuint's Niraj Shah in an interview.

The government set the capex target of Rs 7.5 lakh crore for FY23, about 2.9% of India's GDP. It is 35.4% higher than the budget estimate of Rs 5.54 lakh crore in FY22. Public investment needs to crowd in private investments, Finance Minister Nirmala Sitharaman said while presenting the budget.

Private investments constituted about 4% of India's GDP in 2003. In 2010, they were at 17% and then went all the way back down over the previous decade to 5%. "We're sitting at pretty low levels of private investment to GDP," Desai said.

"The government cannot do the heavy lifting of investing on behalf of the economy. It can only do it when there is a cycle which is depressed and that is where we are right now," he said. "So the government is stepping in and trying to crowd-in private investment and has done various things to do that."

Desai expects India to witness a reasonable, visible capex cycle in the private sector in the next 12 to 18 months. "The government can then cut back on its capital spends which will allow the fiscal deficit to fall."

As the growth cycle improves as a consequence of higher investments and tax revenues go up, the government might recalibrate GST rates in 2024. "This will basically give a fillip to consumption because it puts money back into the hands of households and they will be able to consume more, which is the virtuous cycle you start by crowding in private investments that results in higher consumption and back into more investments," said Desai.

The growth will subsequently get extended from a "normal two or three year period to five or six years. I see that strategy in place," he added.

Desai sees Federal Reserve's policy decisions and the impact on oil prices due to any geopolitical event as probable threats to India's growth cycle. "If the Fed falls far too behind the curve and if there is a geopolitical event that causes oil to keep surging then we have a problem," he said.

"Domestically, we are pretty much on this path of a new growth cycle where India's growth could go back above trend. The trend I reckon is between 6.5-7% real growth," he said.

Themes To Watch

Desai expects three themes to perform as the RBI exits accommodative stance, job market recovers and capex cycle unfolds in 2022.

Financial stocks will do well. "The debate is you know, how much interest rates go up by, we are a little higher than the consensus so if we are right, then financials will do well because financials actually need higher short-term yields to make money," he said.

Credit costs have peaked across banks, according to Desai. "It is tightly linked to profits. If the profits are rising with a lag, then credit costs peak. You don't have profits you can’t service your loans."

As economic activity picks up, credit growth will follow suit, he said. "It will soon enter into double digits and maybe even climb to mid-teen levels," he said. "So you add all these up, banks need higher interest margins and higher credit growth and lower credit costs to make money. I think they will make lots of money in the next two years."

Consumption and industrials are the other themes that are perform, according to Desai. Discretionary consumption is expected to benefit from recovery in jobs and wages and "as capex unfolds, even more jobs will be created". Industrials will do well because capex looks good, he said.

Desai said Morgan Stanley is currently underweight on energy materials and information technology. "IT is a good solid absolute story. My concern is whether it will be able to beat financials in 2022."