The Next India: From a Cyclical Downturn to a Structural Upturn
My thanks to a subscriber for this informative report from Morgan Stanley. Here is part of the Preface:
So India finds itself at a transition, where the cyclical downturn is receding. Given a stable political environment and an accelerated pace of reforms complementing the huge surge in working age population, India will be well positioned to deliver stronger economic and corporate profit growth.
There are of course major hurdles to achieving the near 7% growth rate that our macro team believes is possible. Reforms are required but not a given, and issues around bureaucracy and corruption need to be addressed. But when growth is fuelled by demographics then growth is both an opportunity and an imperative. India needs this growth rate. If it fails to deliver growth at this sort of pace over the next decade it will face a rising unemployment problem – particularly among tertiary graduates – with all the pressures and risks that entails.
India has long had a young population. The difference is it is now better educated, better connected to information, better connected to the world, and there is a rising middle class. All of which points to greater demands for progress and accountability in the public and the private sector over time.
To address the opportunities and challenges facing India, we will be publishing a series of reports on “The Next India”. In this first piece, Chetan Ahya, our Chief Asia Economist, and Ridham Desai, our Head of India Research & Equity Strategist (1) summarise India’s macro story in the context of a three-factor framework of Demographics, Globalisation and Refoms, (2) lay out their thoughts on where they see India in the next 10 years, (3) detail the policy reforms needed to transition to a productive and sustainable growth path, and (4) lay out a framework to evaluate India’s prospects in the coming decade and highlight the three key drivers for equity returns in that time.
Here is the Morgan Stanley report.
The authors are looking for a GDP expansion from US$1.9 trillion to US$5 trillion by 2025.
That would be an impressive growth rate. To achieve it, Central Bank governor Raghuram Rajan’s efforts to rein in inflation will need to be supported by the new government. Modi’s economic team will also need to reduce the budget deficit, simplify rules on investment and production, and hasten infrastructure projects required to make the economy more efficient. Modi can also cut the red tape which has seriously deterred desirable inward investment by foreign firms.
Experienced investors often point out that fast GDP growth does not necessarily ensure comparable stock market appreciation. This may be true but India’s stock market is already benefiting from a re-rating by global investors. A year ago, few people wanted to invest in India. One astonishing election result is changing those perceptions. (See Bloomberg's India Street Wrap, published on the 13th , when the election was perceived as less certain.)
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