India’s Resurgence Should Weather Trade Tensions

Summary

Podcast Summary: India’s Resurgence Should Weather Trade Tensions

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode: India’s Resurgence Should Weather Trade Tensions
• Release Date: March 13, 2025

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Introduction

In the March 13, 2025 episode of Thoughts on the Market, Morgan Stanley's Chief Asia Economist, Chetan Aiya, delves into the current state and future prospects of the Indian economy amidst escalating trade tensions both in Asia and globally. Aiya provides a comprehensive analysis of the factors influencing India's economic trajectory, addressing recent growth concerns and outlining the pathways toward recovery.

Recent Growth Slowdown in India

Aiya begins by addressing the recent skepticism among investors regarding India's growth narrative. He states:

"[Investors] have been caught off guard by the surprising recent slowdown in India's growth. [00:30]"

He attributes this unexpected deceleration to an unforeseen "double tightening of fiscal and monetary policy." Despite the slowdown, Aiya remains optimistic, noting that green shoots of recovery are already visible in recent data and expects the momentum to strengthen in the coming months.

Factors Supporting India's Recovery

Aiya outlines several key factors that bolster his confidence in India's economic outlook:

1. Fiscal Policy Turning Supportive for Growth

The Indian government has been proactive in enhancing fiscal support to stimulate growth. Aiya highlights:

"The government has been ramping up capital expenditure for infrastructure projects like roads and railways, with growth accelerating markedly in the recent months. They've also cut income tax for households, which will be effective from April 2025. [01:10]"

These measures are designed to boost domestic investment and increase disposable income for households, thereby fueling consumption and economic expansion.

2. Easing Monetary Policy

Monetary policy in India is becoming more accommodating, which is conducive to growth. Aiya explains:

"With CPI inflation recently printing at just 3.6%, which is below target. We believe the central bank will continue to pursue easy monetary policy. [02:00]"

Lower inflation rates provide the central bank with the flexibility to maintain lower interest rates, enhance liquidity, and implement favorable regulatory policies that support economic activity.

3. Moderation in Food Inflation and Real Household Incomes

A significant factor contributing to economic resilience is the moderation in food inflation. Aiya notes:

"Moderation in food inflation will mean real household incomes will be lifted. [02:45]"

Higher real incomes increase consumers' purchasing power, leading to greater demand for goods and services, which in turn drives economic growth.

4. Strength in Services Exports

India's services exports, particularly in IT and business services, have been a cornerstone of its economic strength. Aiya observes:

"Services exports include IT services and increasingly business services. In fact, post Covid, India has had very strong growth in business services exports and the key reason for that is post Covid, I think businesses have come to realize that if you can work from home, you can work from Bangalore. [03:20]"

He further emphasizes the impressive growth metrics:

"India's services exports have nearly doubled since December 2020, outpacing 40% rise in goods exports over the same period. This has resulted in services exports reaching $410 billion on an annualized basis in January, almost equal to $430 billion of goods exports. [04:00]"

Additionally, India's market share in global services exports has increased:

"India continues to gain market share in services exports, which now account for 4.5% of global total, up from 4% in 2020. [04:30]"

This growth is attributed to the global shift towards remote work, allowing Indian cities like Bangalore to become pivotal centers for business services.

Risks to India's Economy

While optimistic, Aiya acknowledges potential risks that could impede India's economic progress:

1. Reciprocal Tariff Risks and Trade Deals

India's substantial trade surplus with the United States and the high tariffs imposed on select U.S. imports present challenges. Aiya comments:

"There are some risks India does face reciprocal tariff risks due to its large trade surplus with the US and high tariff rates that India imposes on select imports from the US but we believe that by September October this year, India can reach a trade deal with the U.S. [05:10]"

He is cautiously optimistic that a trade agreement will mitigate these risks.

2. Goods Exports and Regional Comparison

India's goods exports relative to GDP are the lowest in its region, which could be a vulnerability if global trade slows. However, Aiya provides a mitigating perspective:

"India's goods exports to GDP ratio is the lowest in the region and even if global trade slows down due to tariff uncertainties, India's economy won't be as severely affected. [05:45] In fact, it could potentially outperform the other economies in the region. [05:50]"

This suggests that India's diverse economic base and focus on services exports may cushion it against external shocks more effectively than its regional counterparts.

Conclusion

Chetan Aiya concludes that despite the recent slowdown and existing trade tensions, India's economic fundamentals remain strong. With supportive fiscal and monetary policies, increasing household incomes, robust services exports, and strategic risk mitigation, India is poised for a resilient recovery and sustained growth in the coming months.

Key Takeaways:

• India's recent growth slowdown was unexpected but manageable, attributed to fiscal and monetary tightening.
• Government initiatives in infrastructure and tax cuts are revitalizing economic growth.
• Low inflation rates and easing monetary policy provide a conducive environment for expansion.
• Services exports, especially IT and business services, are driving significant growth and increasing India's global market share.
• Potential trade risks exist but are likely to be addressed through forthcoming trade deals.
• India's economy may outperform regional peers due to its balanced export portfolio and economic policies.

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This summary is intended to provide a comprehensive overview of the podcast episode for those who have not listened to it. For detailed insights and the full context, listening to the episode is recommended.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Chetan Aiya, Morgan Stanley's chief Asia economist. Today I'll be taking a look at Indian economy amidst escalating trade tensions in Asia and around the globe. It's Thursday, March 13th at 2pm in Hong Kong. Over the last few months, investors have been skeptical about India's growth narrative. Investors like us have been caught off guard by by the surprising recent slowdown in India's growth. With the benefit of hindsight, we can clearly attribute the slowdown to an unexpected double tightening of fiscal and monetary policy. But India seems to be on its way to recovery. Green shoots are already emerging in recent data and we believe the recovery will continue to firm up over the coming months. What makes us so confident in our outlook for India? We see several key factors behind this trend. First, fiscal policy is turning supportive for growth again. The government has been ramping up capital expenditure for infrastructure projects like roads and railways, with growth accelerating markedly in the recent months. They've also cut income tax for households, which will be effective from April 2025. Second, monetary policy is easing across rates, liquidity and the regulatory front. With CPI inflation recently printing at just 3.6%, which is below target. We believe the central bank will continue to pursue easy monetary policy. And third, moderation in food inflation will mean real household incomes will be lifted. Finally, the strength in services exports. Services exports include IT services and increasingly business services. In fact, post Covid, India has had very strong growth in business services exports and the key reason for that is post Covid, I think businesses have come to realize that if you can work from home, you can work from Bangalore. India's services exports have nearly doubled since December 2020, outpacing 40% rise in goods exports over the same period. This has resulted in services exports reaching $410 billion on an annualized basis in January, almost equal to $430 billion of goods exports. Moreover, India continues to gain market share in services exports, which now account for 4.5% of global total, up from 4% in 2020. To be sure, there are some risks India does face reciprocal tariff risks due to its large trade surplus with the US and high tariff rates that India imposes on on select imports from the US but we believe that by September October this year, India can reach a trade deal with the U.S. in any case, India's goods exports to GDP ratio is the lowest in the region and even if global trade slows down due to tariff uncertainties, India's economy won't be as severely affected. In fact, it could potentially outperform the other economies in the region. Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today. The proceeding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for.