This Analyst Thinks India Is Better Placed In Asia Amid Wary Outlook

Economic growth and consumption recovery, government capital expenditure rising, easing of monetary policy, a decline in price pressure, and service exports recovery are some of the reasons why Morgan Stanley sees India as better-placed in Asia. The New York-headquartered investment bank's view is in contrast with most investors about India's growth narrative.

In a separate report, Morgan Stanley said that India Inc.'s earnings growth is expected to deliver positive surprises in coming quarters due to its strong domestic macroeconomic factors.

Here is a look at what Morgan Stanley talked about in its latest Asia Economics Asia Pacific report.

Morgan Stanley emphasised that India is on the path of recovery. The brokerage already spotted green shoots in latest data. Its preferred high-frequency indicator, GST revenue, rose 10.7% in January and February.

Tripled monetary easing, government capital expenditure recovery, regulatory changes, food inflation decline and rise in service exports are going to drive the growth.

Government capex has picked up from December 2024 to January 2025. According to budget for financial year 2025–26, it is expected to rise 10.1% on the year. Taking into account grant allocation to state governments, the total capex is rising by 17.4%, Morgan Stanley said.

State governments are expected to drive the next phase of public capex recovery, according to the brokerage.

Private capex recovery is expected to be slow as global uncertainties are expected to weigh on overall Asian countries and trade and capex cycle. A slowdown in goods exports may weigh on India's manufacturing sector capex. However, it is unlikely to be significant, given India's less exposure to international trade, the brokerage said.

On the other hand, ease liquidity condition, policy rate, and regulation should provide some relief to the private capex recovery, Morgan Stanley said.

Monetary easing is taking place from three fronts: policy rates, liquidity condition and regulatory changes. Most of the measures in this regard have been taken in last three-to-six weeks. Therefore, the effect will take some time to be felt.

A decline in food prices brought headline inflation closer to core inflation, creating room for the Reserve Bank of India to cut rates in early February. The real policy rate has come down 90 basis points to 2.5% in February 2025, the brokerage said.

RBI is returning to a more flexible foreign exchange rate regime since December and taking measures to ease the liquidity condition. The central bank has been conducting open market operations, variable repo rates, and USDINR swaps, Morgan Stanley said.

The central bank has also started relaxing norms on regulatory tightening on non-banking financial companies. "Our India financials analyst Subramanian Iyer believes this would help improve liquidity accessibility for NBFC lenders and end borrowers," Morgan Stanley said.

Private consumption has already staged in the last quarter of calendar year 2024. FMCG goods volume have picked up 7.1% on the year during October–December. This recovery has turned broad-based, which means the recovery is transgressing across various sector sustainably.

Tax cuts, decline in food inflation, robust service exports, an increase in job creation, and monetary easing are going to boost consumption recovery further.

India is less exposed to global goods trade slowdown given it has the lowest goods exports to GDP ratio in the region, said Morgan Stanley. The economy's ability to generate domestic demand will also nullify some of the indirect effects of ongoing tariff wars.

From a tariff risk perspective, India is among the countries who are more exposed to tariff escalation, as it imposes quite high tariffs on some imports compared to many countries in the Asia-Pacific region. Hence, Morgan Stanley flags high uncertainty about the quantum tariff increase the country would face.

A trade deal between India and US will likely happen by fall 2025, officials have indicated, according to Morgan Stanley. Therefore, India will not be able to save itself from the reciprocal tariff which will be effective from April 2. The tariff will likely go up after coming into effect, resulting in increased impact on India.