Explained: Why Morgan Stanley sees India’s growth recovering next year

Udit Misra
Morgan Stanley believes that while the “near term growth is expected to remain weak,” yet the “the triggers for a stronger growth are in place”.

In its latest “Global Macro Outlook” released on Monday, Morgan Stanley (MS), one of the biggest investment banks and financial services firm, has stated that the global economy is likely to recover starting with the first quarter of 2020.

In August, MS researchers had made everyone sit up and take notice when they predicted that the global economy will enter a recession if trade tensions, especially between the US and China, do not subside soon.

What has Morgan Stanley said now?

Moving away from talks of recession, the latest report states that “trade tensions and monetary policy are easing concurrently for the first time in seven quarters, lifting global growth from 1Q20 on”. However, the main thrust of the recovery will come from the emerging markets instead of the US. It has, however, cautioned that the risks to these projections are “skewed to the downside, with uncertainty related to macro policies likely to linger”.

What about India’s growth?

On a yearly basis, India’s growth rate has been falling since 2017-18. This trend of deceleration has intensified in the recent past as reflected in the quarterly GDP growth rates. India’s growth rate has been falling for the past 5 quarters — Q1 GDP print turned out to be the lowest in 6 years — and Q2 data numbers, expected by the end of November, could possibly fall below Q1.

There is no one reason for the growth deceleration. As MS notes: “The past year has been marked by slowing growth due to a combination of factors — risk- aversion in the financial and corporate sector and a slowing trend in capex with adverse implications for job growth and demand. Weak growth has shifted policy-makers' focus to reviving the growth trend”.

What’s the forecast for India?

MS believes that while the “near term growth is expected to remain weak,” yet the “the triggers for a stronger growth are in place”.

On a fiscal year basis, MS expects India’s GDP to grow at 6.5% in the financial year 2020-21 and 6.9% in the financial year 2021-22 as against just 5% in the current financial year (2019-20).

What are the “triggers” for stronger growth?

The MS projections, as any set of growth projections, are based on a variety of assumptions. Hence, the variation (see table).

One expectation is that the monetary easing that has taken place since February 2019 — RBI has cut repo rates by 135 basis points — will start to take effect as the monetary transmission picks up and borrowers get loans at cheaper rates. What’s more, there is an expectation that, even though retail inflation has crossed the RBI’s comfort mark 4% ( and likely to stay there in the immediate future), MS expects the RBI to cut another 40 basis points from the repo rate and aggressively push for monetary transmission.

Two, thanks to the sharp cut in corporate tax rates, they expect private firms to increase their capital expenditure over the next 12-18 months “as the corporate sector balance sheet position improves and demand conditions stabilise in the next 6-9 months, providing a basis for a pick-up in capacity utilisation”.

What more is needed for India to grow?

As the table shows, whether India’s GDP growth rate stays below the 6%-mark till the end of 2021 or reaches 7.5% depends on a whole host of factors.

Here are the key assumptions for India’s growth to recover:

1.  The government “streamlining” personal taxes in line with the corporate tax cuts in the coming Union Budget to be announced in February 2020. A cut in income tax rates (or some rationalisation of the tax slabs) that leaves consumers with some additional incomes is likely to spur consumption and boost economic growth.

2. Streamlining/front-loading spending on infrastructure investment. MS believes that if the government was to spend on infra projects such as roads etc. it would be a positive trigger to the private firms who will join as being in business would be more viable.

3. MS also expects that the government and other regulatory authorities to take “steps to improve the flow of resources to the commercial sector”.

4. It is also crucial that the Indian government improves its public finances “through large-scale strategic divestment”.

Apart from these specific measures, MS also hopes that the Indian government would set right some of the structural bottlenecks that have held back India from achieving its potential. These include issues like factor market reforms — making it easier to acquire land for business and making it easier to hire (and fire) labour — and improving the ease of doing business, boosting export share etc.