India to be the fastest-growing Asian economy in FY23: Morgan Stanley

Analysts at Morgan Stanley expect India's gross domestic product (GDP) growth to average 7 per cent in 2022-23. The Indian economy, they said, is set for its best run in over a decade.

India is likely to be the fastest-growing Asian economy in the Asian region in 2022-23, according to analysts at Morgan Stanley, who expect the expect India’s gross domestic product (GDP) growth to average 7 per cent during this period – the strongest among the largest economies – and contributing 28 per cent and 22 per cent to Asian and global growth, respectively. The Indian economy, they said, is set for its best run in over a decade, as pent-up demand is being unleashed.

“We have been constructive on India’s outlook, both from a cyclical and structural perspective, for some time. The recent strong run of data increases our confidence that India is well positioned to deliver domestic demand alpha, which will be particularly important as developed market (DM) growth weakness percolates into Asia’s external demand,” wrote Chetan Ahya, chief Asia economist at Morgan Stanley in a recent coauthored note.

The key change in India’s structural story, according to Ahya, lies in the clear shift in the policy focus towards lifting the productive capacity of the economy. Policymakers, he wrote, have taken up a series of reforms which will catalyze an upswing in the private capex cycle, helping to unleash a powerful productivity dynamic, leading to the onset of a virtuous cycle.

A large part of this optimism has stemmed from a drop in commodity prices, especially crude oil. With a 23 – 37 per cent decline in oil / commodity prices since the March 2022 peak, Morgan Stanley expects macro stability indicators will head back towards the comfort zone and that the Reserve Bank of India (RBI) may not have to hike rates aggressively going ahead.

"We project that RBI does not need to lift rates deeply into restrictive territory. In other words, RBI will not need to slow domestic demand growth meaningfully to control macro stability indicators. From a medium-term perspective, the key risk is if policy makers make a shift towards redistribution rather than focusing on boosting private investment. In the near term, India is still exposed to global supply shocks like a renewed spike in oil / commodity prices," Ahya said.

Since May 2022, the RBI has hiked rates cumulatively by 140 basis points (bps) in quick succession, lifting policy rates now to 5.4 per cent, which is a touch above pre-pandemic levels of 5.1 per cent.

Besides the fall commodity prices, reopening of the economy earlier this year has also aided economic recovery. Demand, according to Morgan Stanley, has been on an uptick as mobility increased and remained above pre-Covid levels over the last few months.

"The strength of the recovery provides a comforting backdrop and represents the strongest performance of the economy in almost a decade. What’s more, it is the breadth of the recovery where we are seeing growth firing on almost all cylinders, which is very encouraging. Even though exports will slow in India just as we expect them to elsewhere in the region. Even in this instance, we expect that services exports will hold up better than goods exports, acting as a mitigating factor," Morgan Stanley said.