India set up for big economic growth

A decade of transformation sets India for big economic growth India has undergone tremendous transformation in the past decade, making it a key driver for global growth, says Morgan Stanley in its latest report.

The American investment bank's endorsement of the Narendra Modi government is based on an analysis of 10 different parameters. “This India is different from what it was in 2013. In a short span of 10 years, India has gained positions in the world order with significant positive consequences for the macro and market outlook,” it noted.

Several indicators and studies appreciate Modi's government's contribution to India's economic transformation and its growing influence on the international platform. India has leapfrogged the UK to become the world's fifth-largest economy and is roaring to grab the third position by 2047. India’s GDP accelerated to 6.1 percent in the last quarter of 2022-23, thus uplifting economic growth in annual growth in 2023 to 7.2 percent. JP Morgan, a global financial services agency, has improved its growth forecast for the Indian economy to 5.5 percent for 2024.

Morgan Stanley expects the share of manufacturing and capex would rise in the country’s GDP by approximately 5ppt by 2031. “The strong rebound in manufacturing is the cherry on top since the modest recovery in the sector was a concern for policymakers. Strong manufacturing and construction growth is encouraging because it is key to private investment in the coming quarters,” said Rumki Majumdar, Economist at Deloitte.

Modi government’s flagship ‘Make In India’ initiative played a crucial role in facilitating investments and promoting innovations. This drove overall development and innovations, thus spurting manufacturing. There is expected to be an increase in capex plans thanks to a rebounding economy, rising demand growth, and supportive government policies. “With industry capacity utilization rates and the government's capex spending reaching high levels, private investments will crowd in sooner than expected,” Majumdar said.

The export market share of India will increase by 4.5 percent by 2031, which is doubled from the 2021 levels, forecast the Morgan Stanley. It says there will be broad-based gains in goods and services exports. India has come up with a new trade policy, which envisages achieving USD 2 trillion in exports by 2030. Despite the disruptions in the global market, India's exports saw a 14 percent increase in 2023 year-on-year, in accordance with what Morgan Stanley has forecasted in the recent report.

Morgan Stanley calculated that per capita income in India is set to increase to USD 5,200 by 2032 from the current USD 2,000. It will have major implications on the country’s consumption basket, which will give a boost to discretionary consumption. The government of India has an ambitious target of achieving a per capita income of USD 10,000 by 2047 when India completes 100 years of its independence. India expects its economy to grow close to USD 20 trillion by 2047.

Initiatives and schemes taken by the Modi government, such as direct transfer of subsidy, insolvency, and bankruptcy code, a new real estate law, corporate-friendly policies, and efficient management of inflation, are some of the factors that led to better prospects for the country's economy in future. Morgan Stanley said inflation would remain “benign and less volatile, " implying shallower rate cycles and, thus, more benign equity market cycles.

“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,” it said. It also highlighted the improved macro stability and reduction in dependence on global capital market flows to fund the CAD. Morgan Stanley said India’s reliance on global capital market flows has reduced. Moreover, it found the Indian market's sensitivity to a US recession, and US Fed rate changes are waning.

Modi government has been proactive in creating the right business environment and facilities that foster globally competitive firms. The global financial agency said the share of profits in GDP now has doubled from all-time lows that happened due to the Covid-19 pandemic. It is expected to rise further and likely to double, which will lead to strong absolute and relative earnings. “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,” reads Morgan Stanley.