Why This is Indias Decade

Ridham Desai, Managing Director, Morgan Stanley India presents his opinion about what the new India holds in terms of changes in the country’s economy

We first wrote about ‘The Next India’ in 2014 in a series of reports that looked at the trends and policies shaping the future of the economy. As that future is largely here, we now turn our attention to ‘The New India’ to mark the next phase of growth. Critically, India has a number of advantages that we believe will last through the end of this decade. In fact, it is perhaps the only major economy poised to benefit from four global megatrends: demographics, digitalization, decarbonisation and deglobalisation. And two of those trends – demographics and deglobalisation – will act as headwinds in most other economies.

All told, we estimate that India will drive a fifth of global growth through the end of this decade on its way to becoming the world’s third-largest economy. The three pillars of this growth are:  

1. Offshoring — The pandemic only enhanced India’s attractiveness as the office to the world. But new developments such as the trends outlined in Morgan Stanley’s multipolar world thesis, along with government incentives to boost investments and corporate profits, are allowing India to gain traction as a factory to the world as well. Investment in services and manufacturing will come from foreign direct investment and a large increase in private domestic investment.  

2. Digital Differentiation — India is pursuing a distinct model for the digitalization of its economy, supported by a public utility called IndiaStack. IndiaStack, which operates at population scale, is a transaction-led, low-cost, high-volume, small-ticket size system with embedded lending. It will take India from a ‘prepaid’ economy to a ‘postpaid’ one. The digital revolution has already changed the way India handles documents, invests and makes payments, and it is also set to alter the way India lends, spends and insures.  

3. Energy Transition —While the first two drivers are unique to India, the world has seen energy transitions before. The difference for India is that both its energy consumption and energy sources are changing simultaneously in a disruptive fashion. Another difference is that India’s energy needs are still growing, and therefore legacy capacity using fossil fuels will not be destroyed as it transitions to a higher share of renewables.

India’s per-capita energy consumption is likely to rise 60 per cent, as per our estimates, to about 1,450 watts per day in the coming decade, with two-thirds of the incremental supply coming from renewable sources. We believe this will positively impact India’s terms of trade and entail about three-quarters of a trillion dollars in energy capex. It will also eventually reduce headline inflation volatility as the imported energy share of GDP declines, lower fertiliser subsidies, improve living conditions and create new demand for solutions such as electric vehicles, cold storage chains and green hydrogen-powered trucks and buses.

Supporting these factors are:

• Morgan Stanley’s multipolar world thesis and India’s rise in the global economy.

• India’s commitment to the Paris Accord.

• Major investments in terms of both dollars and institutional infrastructure to leverage India’s biometric identity system, Aadhaar.

• Government policies targeted at lifting the share of profits in GDP, with a concomitant positive effect on investment.  

Economic Implications

By 2031, we expect the gross domestic product (GDP) to cross USD 7.5 trillion, more than double the current level, a discretionary consumption boom, an 11 per cent annual compounding of stock market capitalisation to USD 10 trillion and credit to GDP rising from 57 per cent to 100 per cent.We believe consumer discretionary spending will gain share in total consumption as per-capita GDP has crossed the important USD 2,000 mark. India’s income pyramid offers unique breadth of consumption, in our view, with the top end spending like the richest in the world and the bottom end still relatively poor. The number of households earning in excess of USD 35,000 per year is likely to rise fivefold in the coming decade to over 25 million.

Industry Implications

• Financial Services — Industry growth will be driven by a lending boom, improved insurance pricing, greater penetration and sophisticated tech infrastructure.

• Consumer Discretionary — This includes automobiles, automotive parts and healthcare services. There will be gains from rising disposable income, market reorganisation and technology.

• Industrials, Domestic Materials and Real Estate — Capex boom driven by defence indigenization, energy, infrastructure, the internet, materials (especially cement) and, mostly importantly, manufacturing.

• Exporters — Rising exports from the diversification of supply chains away from Europe and China and increased offshoring of services to India.

Where Could We Go Wrong?

Risks that could derail or slow our thesis include a prolonged global recession or sluggish growth, adverse geopolitical developments, domestic politics and policy errors, shortages of skilled labour and steep rises in energy and commodity prices.