9 years of PM Modi govt: India transformed in less than a decade, different from 2013, says Morgan Stanley

Morgan Stanley, in its latest report, hailed the PM Narendra Modi-led government and said that 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.  

The report, India Equity Strategy and Economics: How India Has Transformed in Less than a Decade, has predicted that India will emerge as a key driver for Asia and drive a fifth of global growth in the next decade.  

“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 report said.

“We have highlighted the 10 big changes, mostly because of India's policy choices, and their implications for its economy and market. These are Supply-side Policy Reforms, Formalisation of the Economy, Real Estate (Regulation and Development) Act, Digitalising Social Transfers, Insolvency and Bankruptcy Code, Flexible Inflation Targeting, Focus on FDI, India's 401(k) Moment, Government Support for Corporate Profits, and MNC Sentiment at Multiyear High,” the report added.

Noting its achievements over the years, the report said in 10 years, India’s base corporate tax rate has stayed below 25 per cent while for new companies with operations commencing before March 24, it has stayed at 15 per cent.

In terms of infrastructure development, the report said there has been significant development in national highways, broadband subscriber base, renewable energy and railway route electrified.

In the formalisation of the economy, Morgan Stanley report has noted how GST collections, which were showing upward trends over the years, and digital transactions, which grew 76 per cent of the GDP, have benefitted the economic growth.

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 added.  

10 implications in the report  

The report has noted that the following observations:  

> The manufacturing and capex as a percentage of GDP will increase steadily by roughly 5 per cent by 2031. “We expect a new cycle in manufacturing and capex, as we estimate the share of both to rise in GDP by approximately 5 percentage points by 2031,” the report said.

> Export market share to double: We estimate that India's export market share will rise to 4.5 per cent by 2031, nearly 2x from 2021 levels, with broad-based gains across goods and services exports.  

> Major shift in consumption basket: As India's per capita income increases from $2,200 currently to about $5,200 by FY2032, this will have major implications for change in the consumption basket, with an impetus to discretionary consumption.  

> Lower volatility in inflation and shallower interest rate cycles: We expect inflation to remain benign and less volatile, which would imply shallower rate cycles. Shallower rate cycles could also imply more benign equity market cycles.  

> 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.  

> A profit boom: The share of profits in GDP has doubled from all-time lows hit in 2020 and is set to rise further – maybe even double from here – leading to strong absolute and relative earnings. 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 global bank said.  

> Lower correlation with oil prices: Lower share of foreign portfolio (FPI) in current account funding has reduced the stock market's negative return correlation with oil prices, especially when oil prices rise due to supply disruption.

> Lower correlation with US recession: As 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.  

> Valuation re-rating: 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 Morgan Stanley report has also predicted unprecedented growth in financial services in India till 2032 and an energy boom in the next few years.  

The report further noted that some of the key risks for the Indian economy going ahead would be a global recession, a fragmented general election outcome in 2024, a sharp rise in commodity prices due to supply outages, and shortages in skilled labour supply.  

On May 18, Morgan Stanley said India is poised to grow at 6.2 per cent in the current financial year 2023-24 with improving macro stability.

Reacting to the report, Rajeev Chandrashekhar, the union minister for information technology tweeted that under PM Modi the new India is different from what it used to be between 2004 and 2014.

 

Also read: Netflix, Hotstar, Prime Video to get tobacco headache; govt issues strict new mandate

Also read: Adani row: Sebi proposes sweeping changes in FPI disclosure norms