Morgan Stanley Revises India's GDP Growth Estimates Down

The growth environment has deteriorated in India recently, report Chetan Ahya and Tanvee Gupta in Morgan Stanley's latest Global Economic Forum, and consequently they have revised their GDP growth estimates down from 7.4% to 7.1% for F2009 and from 7.8% to 7.6% for F2010.

Morgan Stanley covers several factors that have led to this revision, among them, weaker consumption growth and slower export growth. Household leveraged spending is down (seen, inter alia, in two-wheeler sales), while growth in consumer goods production fell to only 4.3% in the three months to January 2008 from a peak of 18.5% in June 2005. Weakening global demand together with the rupee's appreciation led export growth to fall to 7.9% over the past six months compared with 23.3% in the year to March 2007. A looser fiscal policy may help to soften the blow, but, as Ahya and Gupta argue, some slowdown in consumption was necessary to reduce the risk of overheating:

Private corporate capex has been the bright spot so far. Although some amount of slowdown in consumption was critical to reduce the overheating risks, the extended duration of this weaker growth phase could cause serious damage to overall growth momentum. We believe that this sharp slowdown in demand for final goods has started weighing on the corporate sector’s confidence for business investment. Indeed, an aggressive pick-up in corporate investment two years back is now beginning to show up in the form of operative capacity available for production. In our view, weaker sales growth when the capital charge for new capacity is increasing will hurt corporate profitability and sentiment.

Headline inflation in India accelerated to 6.7% during the week ended March 15, 2008, which Morgan Stanley argues will mean it is less likely that the Reserve Bank of India will cut its rates at its April policy meeting. This, together with increased risk aversion in the global financial markets, leads Ahya and Gupta to conclude that business investment will now start slowing over the next six months. And India has become more dependent on the global capital markets, as the analysts explain:

India’s growth acceleration has benefited more from the globalization of capital markets than from the globalization of trade. The inflection point for the current growth cycle was April 2003, which signaled the start of the synchronous rise in emerging market equities. We believe that a favourable sustained global risk appetite trend has been at the heart of India’s current growth acceleration cycle: average GDP growth accelerated to 9.5% during F2006 and F2007 from an average of 6.2% in F2003 and F2004. The risk-appetite growth linkage is as follows: rise in risk appetite – rise in non-FDI capital inflows – lower real rates and strong credit-driven growth. In this context, we believe that the key concern for India’s growth outlook will be continued turbulence in the US financial markets and its impact on capital inflows into India.

Comments

[ravi1967]

i agree with MS. The primary concern is containing inflation that is ballooning out of control. Edible oil i use is up for 70 per litre to about 150 per litre in just 4 months, wheat up by nearly 20%. Thus common man will vote out the current government in 2009 polls. but who will form the next gov, is the moot point as no one has a clue on containg inflation.Ultimately credit lending will face a massive cut , lending rates will go up, and stagflation is going to set in as we couple with US and European markets.so bye bye growth figures of 10%. i anm sure the real figures will be 6% and not around 8% as projected by MS

[Gordy]

I disagree with the analysis presented. As a recent visitor to India, specifically Mumbai, I saw no end to the explosive growth in India. Yes, prices are rising but the average Indian has more disposable income than ever before. The shops and factories are very busy and their large population is the engine that continues to drive growth. My outlook on India is BULLISH!!!

[ratsharp]

btw the combined analyst expectation of MS for this qtr earning is a 23% YOY growth .. higher than the prior qtr's 17% yoy growth... hmmm so is india earnings really slowing .. or is this just a corection related to the risk premia...

[ravi1967]

my humble request to mr.gordy is to come of out mumbai. mumbai is not india. the super riches live in mumbai. they have not been touched by inflation as salaries are increased. but to who are the major companies supplying ? indian customers(read mum,pop,wife) employed in software majors servicing us and european markets. so if usa takes a hit, will not these comapnies take a hit. ( see infy projections that project confirmations are being postponed ). ultimately there will be layoff's and bang goes the bubble. Mumbai is just a small nano fraction of india.Take note that most of the super riches do their shopping in dubai,london and newyork.
Just take a look at india industrial production numbers IIP, auto sales numbers, quarterly figures of sales of major companies and you will see the decline slowly setting in. this is because customer is having a credit squeeze.unless inflation is tackeld ,the credit squeeze will not go away.i am not an economist, but a technical analyst of stocks and commodities and i travel a lot to know the ground realities. i was short in indian stocks right from january 2008!!!.

[mumbai_matka]

India's GDP growth among the fastest LARGE global economies. Even a dow turn by 1 per cent keeps india in top ten. Morgan Stanley comes out with bearish report everytime Indian market falls (Just do Google search on Ridham Desai (MS's India strategist) and market correction. This is largely a domestic economy and has little exposure to the US. Net Exports are miniscule. Don't listen to thiese pundits.

[MrBigglesworth]

Does anyone have a forecast for the BRIC index itself? I see India as a sleeping giant in respect to its potential