Morgan Stanley projected India’s real growth to average 6.5% in the decade, making India the third-largest economy at nearly $8 trillion by 2031.
10 transformational changes that have happened in India over the last decade are now set to propel the country to doubling per capita income, doubling export market share, raising the share of manufacturing, boosting corporate profits, and significantly improving other economic health indicators, said Morgan Stanley.. In its latest report titled ‘How India has Transformed in Less than a Decade’, global investment bank accredited policy changes, such as DBTs, supply-side policy reforms, and modification of the IBC, that led to overwhelmingly positive changes, influencing India’s macroeconomic situation, global standing and local share markets for the better.
Ridham Desai, MD, Morgan Stanley India, also countered global opinions that India has underperformed, saying, “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.” In order to demonstrate his rationale, the report focussed on ten key changes which have had far-reaching consequences and implications for the economy and market.
The ten changes highlighted by Morgan Stanley are:
1.Supply-side Policy Reforms
2.Formalization of the Economy
3.Real Estate (Regulation and Development) Act
4.Digitalizing Social Transfers
5.Insolvency & Bankruptcy Code
6.Flexible Inflation Targeting
7.Focus on FDI
8.India’s 401(k) Moment
9.Government Support for Corporate Profits
10.MNC Sentiment at Multi-year High
The implications of these changes on the economy
The primary impact of the changes is the steady rise of manufacturing and capex as a proportion of the GDP. Morgan Stanley projected that the share of both will gain by 5 percentage points each. Additionally, India’s export market share will rise to 4.5% by 2031, which is nearly twofold from 2021 levels, while the per capita income is expected to clock in at $5,200 within the next decade. “This will have major implications for change in the consumption basket, with an impetus to discretionary consumption,” said the report, adding, “We expect India’s real growth to average 6.5% in the next 10 years, making India the third-largest economy at nearly $8 trillion by 2031, up from fifth-largest currently.”
This structural transformation will feed into the saving-investment dynamics, bolstering the country’s external balance sheet, in turn, leading to a narrower CAD. Domestic profits might double, which, while it explains the rich equity valuations, will lead to “a major rise in investments, a moderation in the CAD and an increase in credit to GDP to support the coming profit growth”.
“Indian companies will likely witness a major increase in their profits share to GDP. Triggered by supply side reforms by the government, we expect a major rise in investments coupled with a moderation in the current account deficit and an increase in credit to GDP to support this rise,” said Morgan Stanley.
Implications on the share markets
Once these implications are achieved, it will lead to a lower correlation with oil prices as well as the US recession. It might also trigger a re-rating in the domestic share markets valuation. “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,” the report added. The report also noted that India’s beta to emerging markets has fallen to 0.6, which is a consequence of improved macro stability and reduction in dependence on global capital market flows to fund the CAD.
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