According to a report by Morgan Stanley titled ‘How India Has Transformed in Less than a Decade,’ the country’s economy and markets have undergone ten significant changes resulting from policy reforms.
The report praised the government led by Prime Minister Narendra Modi and emphasized that India’s current position is primarily a result of the government’s policy decisions and their impact on the economy and market.
Furthermore, the report predicted that India will play a crucial role in driving Asia’s growth and contribute to approximately one-fifth of global economic expansion in the next ten years.
The report highlighted ten significant transformations, largely influenced by India’s policy choices, and their effects on the economy and market. These include reforms in supply-side policies, formalization of the economy, implementation of the Real Estate (Regulation and Development) Act, digitization of social transfers, the Insolvency and Bankruptcy Code, adoption of flexible inflation targeting, a focus on foreign direct investment (FDI), a milestone similar to the concept of India’s 401(k), government support for corporate profits, and increased positive sentiment among multinational corporations (MNCs) reaching multi-year highs.
The report mentioned encountering considerable doubt regarding India, especially from foreign investors, who believe that India has not lived up to its potential, despite being the second-fastest-growing economy and having one of the best-performing stock markets in the last 25 years. These investors also argue that equity valuations in India are too high. However, according to the report, this perspective fails to acknowledge the substantial transformations that have occurred in India, particularly since 2014.
The research firm states that these changes will position India to lead both Asia and the global market in terms of growth. The report, co-authored by Ridham Desai, India equity strategist at Morgan Stanley, highlights a range of transformative changes that have taken place since 2013. These changes include supply-side reforms, the formalization of the economy, increased investments in mutual funds, and the government’s support for corporate profit.
These are the ten major transformations that have occurred in India:
Supply-side policy reforms
According to the report, India has introduced a corporate tax rate of 15% for new manufacturing companies that commence operations before March 2024, which is the lowest rate compared to other countries. The report also mentions that the base corporate tax rate in India is on par with its peers.
Morgan Stanley highlights the infrastructure development in India between 2006 and 2014, as well as from 2015 to 2023. The national highway network expanded from 25,700 km to 53,700 km during this period. Additionally, the capacity for renewable energy increased from 25.7 GW to 95.7 GW. The number of broadband subscribers also saw a significant rise, from 58.9 million to 771.3 million. Furthermore, the electrification of railway routes increased from 6% to 42.3% of the total.
Formalization of the Economy
The formalization of the economy has been hastened by the implementation of the Goods and Services Tax (GST) and the increasing prevalence of digital transactions. The report reveals that digital transactions, as a proportion of the gross domestic product (GDP), have surged from a mere 4.4% in FY16 to 76.1% in fiscal year 2023.
Real Estate Regulation Act
As per the report, the Real Estate (Regulation and Development) Act has played a significant role in boosting housing sales, which have demonstrated a consistent upward trajectory starting in mid-2015 and continuing until the first quarter of 2023. Moreover, even during the pandemic, the housing market has managed to sustain its rebound.
Digitalizing social transfers
Morgan Stanley acknowledged the increase in direct-to-beneficiary transfers within social welfare programs. Although the number of schemes has risen, the amount transferred experienced growth during the years of the pandemic and has since stabilized.
Insolvency and Bankruptcy Code
According to the report, the implementation of the Insolvency and Bankruptcy Code has led to a significant reduction in the impaired loan ratio, reaching its lowest point in the last fiscal year compared to the peak observed in 2017-18. Additionally, the report highlights that corporate debt as a percentage of GDP has been declining since fiscal year 2015 and is projected to further decrease to 50% in fiscal year 2023.
Flexible Inflation Targeting
According to the report, India has managed to separate its policy rate decisions from those of the Federal Reserve, despite inflation being a significant macroeconomic concern. This achievement has been made possible because of the implementation of a flexible inflation targeting system.
Focus on FDI
According to the report, India has remained committed to attracting foreign direct investments since 2015.
India’s 401(k) Moment
As per the report, data indicates that retail participation in the Indian market has been increasing via mutual funds, primarily due to the inflow of systematic investment plan (SIP) funds.
Government Support for Corporate Profit
According to the report, the government’s assistance has contributed to the growth of corporate profits.
MNC Sentiment at a Multi-Year High
Morgan Stanley states that multinational corporations (MNCs) have a more favorable attitude towards India compared to China. The report suggests that these transformations have positive economic and market implications, positioning India as a significant driver of growth in both Asia and the global context. However, the report also mentions potential risks to this outlook, such as a global recession, a fragmented outcome in the 2024 general election, an abrupt increase in commodity prices due to supply disruptions, and shortages in skilled labor supply.
