New govt need to expedite policy reforms for productivity dynamics: MS

The new government needs to speed up policy reforms, which has declined in past few years, to improve productivity dynamics, says a report.

"While the process of macro adjustment is ongoing, the progress on structural reforms needed to improve productivity dynamic is slow," Morgan Stanley said in a report today.

"We believe the new government would need to accelerate the pace of structural policy reforms that improve the productivity dynamic," the report said.

A nine-phase Lok Sabha elections begin from April 7 and will end on May 12 and the new government will be formed before May 31.

The report does not expect major policy actions over the next three months until the new government takes charge.

The country's productivity dynamic has been declining since the 2008 credit crisis mainly due to the bad growth mix on account of declining investment and high fiscal deficit, high growth in rural wages, the report said.

This weak productivity trend is reflected in the sharp rise in incremental capital output ratio, which has risen to a decade high level of 7 and is also corroborated by concerns over price stability (high inflation), financial stability (rising non-performing loans) and external stability (weak balance of payments), it said.

"We will be focusing on the new government's policy actions towards fiscal consolidation, policy efforts to moderate rural wage growth to be in line with productivity trend, policy responses to improve the investment outlook by reducing regulatory hurdles and commitment to clean up public sector banks' balance sheets and infuse capital," Morgan Stanley said.

The report highlighted that while CPI inflation has edged down in recent months, it remains elevated and above policy makers' comfort zone.

"We expect inflation to decelerate over the next 12 months but due to still high government spending and high growth in rural as well as urban wage, the moderation will be gradual," the report said.

CPI inflation eased to 8.1% in February, while wholesale price index decelerated to 4.68% for the same month.