Morgan Stanley has raised India's gross domestic product growth forecast for the financial year 2024-25 by 30 basis points to 6.8% from 6.5%, aided by continued traction in industrial and capex activity. The research firm expects 7.9% GDP growth in FY24.
It expects growth to be broad-based and the gaps between rural-urban consumption and private-public capex to narrow in FY25.
"Domestic demand growth has been steadfast and is a key driver of our constructive outlook for the economy. Consumption accounts for 60.3% of GDP and is the mainstay of the domestic demand story," says Morgan Stanley.
While private consumption has recovered over the last four quarters, with growth tracking at 3.5% in December 2023 versus 1.8% in December 2022, the trend in private consumption is just catching up to the pre-pandemic trend, says Morgan Stanley.
Consumption growth post pandemic has been mixed, with slow recovery in rural demand, the research firm says. "In our view, this reflects: a) shift in consumption toward services while share of goods in wallet share has moderated; and b) low-income segments/rural households balance sheets are in the process of healing post the pandemic and inflation shock," it says.
Current trends in high-frequency consumption data reflect that consumer demand for services remains robust, with both PMI manufacturing and services tracking above the 50 mark since August 21. Auto sales are picking up, with an improvement in passenger vehicle sales, which are tracking at 1.6 times their 2019 levels, while two-wheeler sales growth is showing steady improvement on a low base but remains a tad below 2019 levels.
Consumer sentiment is recovering and is finally tracking close to pre-pandemic levels, according to the report. While job growth has slowed, dragged down by the IT/BPO sector, recent data shows some stabilisation at low levels. On the rural side, rural fast-moving consumer goods sales growth picked up gradually to 5.8% in the last quarter of 2023, which while still lagging urban growth of 6.8% represents a significant narrowing in the two segments, it says.
On the fiscal side, Morgan Stanley expect slow-paced fiscal consolidation with deficit to narrow to 7.9% of GDP in FY25 from 8.9% of GDP in FY24. “We expect the consolidation to be supported by an increase in tax revenues and rationalisation of revenue spending, even as capex spending remains robust,” it says.
The key risk in the near term stems from upcoming general elections, the report says. “While we assume a stable political environment to provide an anchor for effective policy-making, the key risk to India's growth outlook could stem from an unstable political environment, which could increase policy uncertainty,” it says.
Possibility of a weaker-than- expected trend in external demand would affect export income and weigh on capacity utilisation, pushing back capex recovery, Morgan Stanley warns.
Idiosyncratic weather events could affect growth-inflation adversely through the impact on crop production, given agriculture accounts for 18.3% of GDP and food has a weight of 45.86% in CPI, it cautions.
