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The article analyzes India's economic resilience in the face of potential trade tensions arising from US President Donald Trump's tariff policies. Morgan Stanley asserts that India is better positioned than other Asian economies to withstand these pressures due to a combination of factors, primarily its relatively low reliance on goods exports, its strong and growing services sector, and supportive domestic policies designed to stimulate demand. While acknowledging that the recent growth rebound has been somewhat slower than anticipated, the firm outlines several key drivers expected to propel a more robust recovery in the coming months. These include sustained government capital expenditure, a triple easing of monetary policy, moderating food inflation boosting real household incomes, and continued strength in services exports. The article delves into each of these factors, providing supporting data and analysis. It also examines the causes of the recent growth slowdown, attributing it to an unexpected tightening of both fiscal and monetary policy, despite stable macroeconomic indicators. Government spending contracted significantly due to election cycles and slower-than-expected recovery post-elections. The Reserve Bank of India (RBI) also tightened monetary policy through policy rates, liquidity management, and regulatory measures. Despite these past headwinds, the article points to emerging green shoots in recent data, such as accelerated GST revenue growth, as indicators of a strengthening recovery. Morgan Stanley anticipates continued momentum in government capital expenditure, particularly at the state government level, and highlights the FY2026 budget plan's commitment to increased capital expenditure. On the monetary policy front, the article details the RBI's recent easing measures, including repo rate cuts, liquidity injections, and regulatory relaxations for non-bank financial companies (NBFCs). These measures are expected to support growth by lowering borrowing costs and improving credit availability. The moderation of food inflation is also seen as a positive factor, as it will increase real household incomes and boost consumption. India's strong performance in services exports is another key advantage, with services exports having nearly doubled since December 2020. This growth reflects a global trend towards increased demand for services and India's growing market share in this sector. The article also addresses the potential impact of tariffs on India's growth outlook. While India is exposed to direct tariff risks, it is less vulnerable than other Asian economies due to its lower goods exports-to-GDP ratio. However, the indirect effects of tariffs, such as weaker corporate confidence and reduced capital expenditure, could still pose a challenge. Morgan Stanley believes that reaching a trade deal with the US will be relatively challenging given the multiple bilateral trade issues. The anticipated timeline for a possible US-India free trade agreement is Fall 2025, implying that India may face reciprocal tariffs until a deal is reached. The firm emphasizes that the bigger effect on growth from tariffs likely comes via the indirect transmission channel of weaker corporate confidence and the spillovers to capex and trade cycle.
The foundation of Morgan Stanley's positive outlook on India's economic resilience rests on several key arguments. Firstly, India's relatively low dependence on goods exports compared to other Asian economies provides a buffer against global trade slowdowns. This insulation is further strengthened by the robust growth of its services sector, which has outpaced goods exports in recent years. This structural shift towards a service-oriented economy not only reduces vulnerability to global trade fluctuations but also opens up new avenues for growth, particularly in areas such as IT, business process outsourcing, and digital services. Secondly, the Indian government's commitment to sustained capital expenditure is expected to play a crucial role in driving economic recovery. Increased investment in infrastructure projects, such as roads, railways, and ports, will not only boost economic activity in the short term but also enhance the country's long-term competitiveness. The FY26 budget plan's emphasis on capital expenditure signals a continued commitment to this strategy. Thirdly, the Reserve Bank of India's (RBI) proactive monetary policy easing is expected to provide further support to the economy. The recent repo rate cuts, liquidity injections, and regulatory relaxations for NBFCs are designed to lower borrowing costs, improve credit availability, and stimulate investment and consumption. These measures, combined with moderating food inflation, are expected to boost real household incomes and increase consumer spending. Fourthly, the article highlights the importance of a recovering global trade environment. Morgan Stanley expects a gradual improvement in global trade, which will benefit India's exports and overall economic growth. However, it also acknowledges the risks posed by trade tensions and protectionist measures. Finally, the article emphasizes the importance of policy reforms in creating a conducive environment for economic growth. The government's efforts to improve the ease of doing business, streamline regulations, and attract foreign investment are expected to enhance India's competitiveness and attract capital flows. These reforms, combined with the country's large and growing domestic market, provide a strong foundation for long-term economic growth.
Despite the optimistic outlook, the article also acknowledges several challenges and risks facing the Indian economy. One key concern is the slower-than-expected recovery in private capital expenditure. While government capital expenditure is expected to provide a boost to economic activity, sustained private investment is essential for long-term growth. The heightened global uncertainty, trade tensions, and regulatory hurdles could weigh on private investment decisions. The recovery in global demand is crucial for sustaining growth in India's export sector. Although the country's service exports have demonstrated resilience, any significant slowdown in global trade could negatively impact overall exports and economic growth. While the RBI has eased monetary policy, it needs to carefully manage liquidity in the banking system to ensure the financial stability. In order to maintain sustainable economic growth, the Indian government must take steps to further strengthen its fiscal position. Finally, structural constraints like land acquisition issues, labor market rigidities, and infrastructure bottlenecks continue to impede long-term growth. Addressing these issues will require sustained policy efforts and reforms. Furthermore, the article notes that reaching a trade deal with the US may prove challenging given the existing trade frictions, indicating continued tariff uncertainty. In conclusion, the article presents a nuanced assessment of India's economic outlook, highlighting both its strengths and weaknesses. While India is well-positioned to withstand global trade tensions due to its strong domestic demand and growing services sector, sustained efforts are needed to address the challenges and risks facing the economy. The government's commitment to capital expenditure, monetary policy easing, and policy reforms will be crucial in ensuring long-term economic growth and stability. Therefore, the government should carefully navigate the changing global economic landscape and implement prudent policies. By maintaining a strong and stable macroeconomic environment and pursuing further reforms, India can fully realize its economic potential and become a global economic powerhouse.
Source: Morgan Stanley says India best placed to tackle Trump tariff: Here’s why…