Morgan Stanley Report on Indian Economy

·  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.

·   The ten changes highlighted by Morgan Stanley are:

      1.       Supply-side Policy Reforms

      2.      Formalisation 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  

Q.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. 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

Q. Implications on Stock Market:

·   There is a possibility of higher valuations for domestic shares, which could lead to increased investment opportunities.

·   The demand for stocks within India is expected to remain strong, contributing to sustained growth in the market.

·     India's reduced dependence on global capital flows may contribute to a more stable stock market, with less vulnerability to international market fluctuations.

·    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.