Morgan Stanley lowers India’s FY23 GDP forecast to 7.2%

Just a few days back, Nomura had downgraded India’s full year real GDP growth for FY23. Now Morgan Stanley has also followed suit and slashed its forecast for India’s real GDP growth for FY23 by a full 40 basis points from 7.6% to 7.2%. It has also cut the real GDP forecast for FY24 by 30 bps from 6.7% to 6.4%. In a volatile market like we have today where global risks are changing on a daily basis; the 2 year and 3 year forecasts really do not have much of relevance. However, they do show us the direction of institutional thinking.

One of the reasons pointed by Morgan Stanley for the weak growth expectations is the tepid growth in exports. In fact, merchandise exports is stagnating at around $40 billion over the last 4 months. If you add up merchandise trade and services trade, then the total exports are about 20-21% of the GDP. This could delay a full-fledged growth recovery as external demand weakens sequentially. If the global recession becomes a reality, then the Indian economy could have a real challenge on hand trying to keep exports buoyant.

The downside risks to GDP growth, according to Morgan Stanley, stems from a number of factors. For instance, global growth trend is likely to be weaker than expected and that will negatively impact merchandise and services exports. Secondly, there are still a number of supply-side bottlenecks. The war in Russia and the lockdown in China are only worsening things. Above all, there is the big risk that the global central banks may tighten more than warranted and that count translate into a full-fledged recession with negative growth.

While Morgan Stanley has some concerns over the Indian macro performance in the short term, in the light of all the headwinds, it remains positive and optimistic in the medium term. It expects Indian growth to outshine the other EMs and developed economies in the world, supported by robust supply-side policy reforms initiated by the Indian government to reduce the supply shock component to inflation. They expect the Indian economy to return to above the pre-pandemic growth levels latest by the year 2023, not beyond that.

One of the big advantages that India enjoys is a strong domestic demand story, which puts it in a different league compare to most of the Asian economies, that have a predominant export story to growth. To that extent, the inward looking nature of the Indian economy according to Morgan Stanley should actually stand the India growth story in good stead. In short, while there are concerns in the very short term, these factors should get neutralized in the medium term and the normal forces of growth should likely take over.

Perhaps, the most important aspect of growth that Morgan Stanley has written about is the inflation story. There have been fears that India could enter into a period of stagflation wherein the growth would remain tepid but the inflation would soar to new highs. However, Morgan Stanley believes that the near-term inflation trajectory would most likely be lower than previously estimated. This can largely be attributed to the recent deceleration in commodity prices across the world as well as the sharp fall in food prices. 

Continuing on the subject of inflation, Morgan Stanley expects CPI inflation in India to average below 6% mark. However, disruptions in monsoons and to the food supply cycle post the Kharif season could be a key risk factor to watch out for. The average CPI inflation for FY23 is estimated at 6.5%; i.e. 50 bps lower than the original estimates. However, this is expected to taper further to 5.3% in the year after that. However, Morgan remains hawkish and expects the policy repo rate to stabilize at 6.5% by April 2023, 160 bps higher from here.