Morgan Stanley’s latest report has said significant changes have taken place in India since 2014 with the country gaining positions in the world order. It has predicted that India will emerge as a key driver for Asia and drive a fifth of global growth in the next decade.
This is a big fillip for the Narendra Modi government’s record.
The report has, however, warned of a key risk — “a fragmented general election outcome in 2024” — that could impact its predictions. The BJP and the Centre are expected to cite this report to showcase how it has transformed the country under the leadership of PM Modi and the importance of keeping him in power.
“We run into significant skepticism about India, particularly with overseas investors, who say that India has not delivered its potential (despite its being the second-fastest-growing economy and among the top-performing stock markets over the past 25 years) and that equity valuations are too rich. However, such a view ignores the significant changes that have taken place in India, especially since 2014,” the Morgan Stanley Report said, citing “10 big changes” in the country.
The report has estimated that India will drive a fifth of global growth through the end of this decade. “India’s next decade will resemble China in 2007-11. GDP and Productivity Growth differentials will swing in India’s favour,” the report says.
Titled as ‘How India has Transformed in Less Than a Decade’, the Morgan Stanley report says “this India is different from what it was in 2013”.
Significant Changes
The report cites 10 big changes in India in the last nine years. The first is the supply-side policy reforms, saying that India’s corporate tax is at par with its peers and Infrastructure has picked up pace in the last eight years. It cites tremendous growth in incremental infrastructure progress in areas like national highways, broadband subscribers, renewable electricity and electrified railway routes.
The report also cites how GST collections in India are on an upward trend and the rising proportion of digital transactions as a percentage of the GDP that stands at 76.1% in the last financial year. The report also cites increase in new real estate projects since the enactment of the Real Estate (Regulation and Development) Act by the Modi government.
It also mentions the rising Direct Benefit Transfers (DBT) to the beneficiaries over the years. It further says the Insolvency and Bankruptcy code has brought the impaired loan ration at a 12-year-low, and corporate debt as a percentage of the GDP has come to 50% in the last financial year. This has come down from 62% in 2015, the report says.
The Morgan Stanley research also shows that flexible inflation targeting regime has allowed decoupling of Fed and RBI Policy Rate Hike Cycle, in a change from 2009 to 2014 when high inflation was driven by a loose monetary and fiscal policy.
The report has also praised India’s focus on Foreign Direct Investment (FDI) as well as government’s support for corporate profits.
The report says MNC sentiment is at a multi-year high with India outperforming China on this sentiment. It also cited how India’s service export market share has accelerated resulting in an ‘offshoring boom’.
Big Takeaways
In short, the report says manufacturing and capex as percentage of GDP will increase steadily by roughly 5% by 2031. It says the export market share could double to 4.5% by 2031, nearly 2x from 2021 levels, with broad-based gains across goods and services exports.
It also predicts a major shift in consumption basket with India’s per capita income increasing from US$ 2,200 to US$ 5,200 by 2032. This will have major implications for change in the consumption basket, with an impetus to discretionary consumption.
It predicts lower volatility in inflation and shallower interest rate cycles, inflation to remain benign and less volatile, which would imply shallower rate cycles. Shallower rate cycles could also imply more benign equity market cycles, the report says.
It also speaks of a benign trend in current account deficit. “We believe India’s structural transformation will feed into the saving-investment dynamics, implying gains for its external balance sheet, with a progressively narrower trend in the CAD,” the report says.
Morgan Stanley has predicted a “profit boom” saying the share of profits in GDP has doubled from all-time lows hit in 2020 and are set to rise further, “maybe even double from here –- leading to strong absolute and relative earnings”
It says this explains India’s apparently rich headline equity valuations. “Triggered by supply-side reforms by the government, we expect a major rise in investments, a moderation in the CAD and an increase in credit to GDP to support the coming profit growth,” the report says.
India’s reliance on global capital market flows has reduced, the market’s sensitivity to a US recession and US Fed rate changes also seems to be fading, the report added.
On valuation re-rating, the report says this reflects persistent domestic demand for stocks and higher growth for longer. “India is trading at a premium to long-term history, albeit well off highs and in line with recent history. India’s beta to EM has fallen to 0.6: This is a consequence of improved macro stability and reduction in dependence on global capital market flows to fund the CAD,” the report adds.
Morgan Stanley has also predicted an unprecedented growth in financial services in India till 2032 and an energy boom, along with a discretionary spending being on the horizon.
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