Our Chief Asia Economist Chetan Ahya discusses the early
indications of India’s economic recovery and why the country
looks best-positioned in the region for growth.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan
Stanley’s Chief Asia Economist.
Today I’ll be taking a look at the Indian economy amidst
escalating trade tensions in Asia and around the globe.
It’s Thursday, March 13, at 2pm in Hong Kong.
Over the last few months, investors have been skeptical about
India’s growth narrative. Investors – like us – have been caught
off-guard by the surprising recent slowdown in India’s growth.
With the benefit of hindsight, we can very clearly attribute the
slowdown to an unexpected double tightening of fiscal and
monetary policy.
But India seems to be on its way to recovery. Green shoots are
already emerging in recent data. And we believe the recovery will
continue to firm up over the coming months. What makes us so
confident in our outlook for India?
We see several key factors behind this trend:
First, fiscal policy’s turning supportive for growth again. The
government has been ramping up capital expenditure for
infrastructure projects like roads and railways, with growth
accelerating markedly in recent months. They have also cut income
tax for households which will be effective from April 2025.
Second, monetary policy easing across rates, liquidity, and the
regulatory front. With CPI inflation
recently printing at just 3.6 per cent which is below target, we
believe the central bank will continue to pursue easy monetary
policy.
And third, moderation in food inflation will mean real household
incomes will be lifted.
Finally, the strength in services exports. Services exports
include IT services, and increasingly business services. In fact,
post-COVID India’s had very strong growth in business services
exports. And the key reason for that is, post-COVID, I think
businesses have come to realize that if you can work from home,
you can work from Bangalore.
India's services exports have nearly doubled since December 2020,
outpacing the 40 per cent rise in goods exports over the same
period. This has resulted in services exports reaching $410
billion on an annualized basis in January, almost equal to the
$430 billion of goods exports. Moreover, India continues to gain
market share in services exports, which now account for 4.5 per
cent of the global total, up from 4 per cent in 2020.
To be sure there are some risks. India does face reciprocal
tariff risks due to its large trade surplus with the US and high
tariff rates that India imposes select imports from the U.S. But
we believe that by September-October this year, India can reach a
trade deal with the U.S.
In any case, India's goods exports-to-GDP ratio is the lowest in
the region. And even if global trade slows down due to tariff
uncertainties, India's economy won't be as severely affected. In
fact, it could potentially outperform the other economies in the
region.
Thanks for listening. If you enjoy the show, please leave us a
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a friend or colleague today.
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