In the past decade, India has experienced 10 transformative changes that are now driving the nation towards doubling per capita income, export market share, increasing manufacturing’s share, enhancing corporate profits, and significantly improving other economic health indicators, according to Morgan Stanley. Their recent report, ‘How India has Transformed in Less than a Decade,’ credits policy changes such as Direct Benefit Transfers (DBTs), supply-side policy reforms, and adjustments to the Insolvency and Bankruptcy Code (IBC) for bringing about overwhelmingly positive shifts in India’s macroeconomic situation, global standing, and local stock markets.
Ridham Desai, Managing Director of Morgan Stanley India, refuted the widespread belief that India has underperformed: “We run into significant skepticism about India, particularly with overseas investors, who say that India has not delivered its potential… and that equity valuations are too rich.” Desai added that this perspective “ignores the significant changes that have taken place in India, especially since 2014.” The report highlights ten crucial changes with extensive implications for both the economy and the market to support his argument.
The ten changes highlighted by Morgan Stanley are:
- Supply-side Policy Reforms
- Formalisation of the Economy
- Real Estate (Regulation and Development) Act
- Digitalizing Social Transfers
- Insolvency & Bankruptcy Code
- Flexible Inflation Targeting
- Focus on FDI
- India’s 401(k) Moment
- Government Support for Corporate Profits
- MNC Sentiment at Multi-year High
The consequences of these changes on the economy
The main effect of these transformations is the consistent growth of manufacturing and capital expenditure as a percentage of GDP. Morgan Stanley forecasts that each will increase by 5 percentage points. Furthermore, India’s export market share is predicted to reach 4.5% by 2031, nearly doubling from 2021 levels, while per capita income is anticipated to reach $5,200 in the next ten years. “This will have major implications for change in the consumption basket, with a boost to discretionary consumption,” the report stated, 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 shift will impact saving-investment dynamics, strengthening the nation’s external balance sheet and consequently narrowing the current account deficit (CAD). Domestic profits could potentially double, which, although explaining high equity valuations, will result in “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 stock markets
Upon realizing these consequences, there will likely be a reduced correlation with oil prices and the US recession. This could also prompt a revaluation in domestic stock market valuations. “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 noted. Additionally, the report observed that India’s beta to emerging markets has decreased to 0.6, a result of enhanced macro stability and a reduction in reliance on global capital market flows to finance the CAD.