Emerging markets will see more volatility in 2014 and the upcoming elections in India could be a major driver of capital markets next year, says a Goldman Sachs investment research report.

While markets will be looking for earnings growth, much of the investor risk appetite will depend on the fundamentals of the economy, Tushar Poddar, India Chief Economist, Goldman Sachs, said on Thursday.

Goldman Sachs’ best guess of a US taper occurring is in March, Poddar said after the release of the report on Emerging Asia Outlook for 2014.

Goldman Sachs expects the Indian economy to grow 4.3 per cent this fiscal and 5.5 per cent in 2014-15. “The upcoming Parliamentary elections in early 2014 are a major area of uncertainty, with potentially large impact on policy reforms and investor/corporate sentiment in either a positive or negative direction,” said the Goldman Sachs report.

Potential upside risks to growth include pent-up investment demand in infrastructure and other sectors.

Downside risks include greater than expected policy rate hikes due to persistent inflation and/or inflationary expectations, or a further tightening in external funding conditions, the report added.

Poddar does not see any significant pick up in India’s economic growth in the second half of this fiscal.

He also sees clear risks of deficits coming out higher than projected.

“Keeping the fiscal deficit at 4.8 per cent of GDP will be a tall order,” Poddar said. There is no sign to suggest any significant increase in output or pick up in investments.

Goldman Sachs had adjusted down its medium-term expectations for the Indian economy. “Rolling forward our forecast horizon, we see potential real GDP growth of 6 per cent over the next few years, though rising gradually as supply side reforms are introduced,” the report added.

> srivats.kr@thehindu.co.in

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