While India’s growth momentum will continue to gather pace in 2024, riding high on sustained domestic demand and resilient capital expenditure, a likely shallow rate cut cycle from the Reserve Bank of India and the impending general elections still demand some caution, believes Morgan Stanley.
After emerging as an oasis of strong economic growth even in the face of a global slowdown in 2023, Morgan Stanley’s optimism for India’s rise remains high. The foreign brokerage forecasts India’s growth to sustain at robust levels of 6.4 percent in 2024 and 6.5 percent in 2025.
The risks
As global economies remain in jeopardy amidst geopolitical issues, high inflation and elevated crude prices, Morgan Stanley expects the RBI to exhibit caution and keep interest rates steady until the first half of 2024. This will be done in a bid to cushion the economy from any potential external risks.
Risks pertaining to a delayed start to the rate-cutting cycle could also emerge from higher commodity prices (especially oil) pushing up inflation or tighter global financial conditions weighing on the currency and adversely impacting macro stability. In such tumultuous times, the RBI will also actively use liquidity management as a policy lever, to ensure price and financial stability, Morgan Stanley believes
While the tightened grip on interest rates may bode well for economic growth in the longer run, it will continue to keep credit costs higher, making it difficult for companies to raise capital.
Another key risk is the impending general elections in May 2024, where the mandate will be a crucial factor in charting out India’s future growth trajectory. Any surprise outcome is likely to have implications for growth and macro stability. A strong political mandate that supports reform measures alongside an improvement in external demand would drive faster growth,” Morgan Stanley highlighted.
On that account, Morgan Stanley sees a delay in the capex cycle and weaker business confidence because of a surprise political outcome or a drag from the external environment as the major downside scenario to India’s growth in the coming years.
Despite some risks in the way, India’s strong fundamental standing has evoked optimism over the country’s path to economic outperformance in the coming time. These resilient macroeconomic indicators also evoke confidence of the economy mitigating much of the risks.
Backing the resilient growth expectations is the robust domestic demand trend, which is fueled by strength in the corporate and financial sector balance sheets and the follow-through of policy reform measures. “We expect consumption to recover further in 2024, driven by the narrowing gap between rural and urban demand and strength in services demand,” the firm stated in its report.
Meanwhile, a recovery in rural consumption is expected to be driven by improving trends in real rural wages. In addition, double-digit growth in public sector capex on the back of central and state government spending, mingled with further pick-up in private investment will act as building blocks to India’s growth story in 2024.