While global trade tensions remain a drag on Asian markets, low goods exports, strong services exports and policy support for domestic demand, make India the best placed in Asia, according to a latest report by Morgan Stanley.
In the report, the global financial services major stated that while investors remain very sceptical about India’s growth narrative, the reversal of the unwarranted double tightening of fiscal and monetary policies could play an important role in driving recovery.
The report adds that while they acknowledge the potential downside risks from trade tensions, they are confident that a recovery in domestic demand is taking shape and will help drive growth momentum, allowing India to take back its driving seat in the region’s growth.
“In the event of a sharper slowdown in global trade, India will also be a relative outperformer considering its goods exports to GDP are the lowest in the region and its services exports tend to be more defensive with an offset from continued gains in market share," the report noted.
Trump tariff and India
A major area of concern for most Asian countries is the anticipated Trump tariffs. The report notes that India too faces tariff risks due to its $46 billion trade surplus with the US and high average tariff rates. Additionally, the US government under President Donald Trump has also signalled potential reciprocal tariffs. This is expected to particularly target pharmaceuticals that currently make up 2.8 percent of India’s exports and 0.3 percent of GDP.
The report notes that while a US-India trade deal is expected by fall 2025, India will likely face higher tariffs before the deal comes into place. Yet, despite these concerns, the report adds that India’s services exports remain strong, reaching $414 billion in January 2025 i.e. around 10.8 percent of GDP and nearly matching goods exports of around $426 billion. Growth has also been seen in the services space with services exports growing 14.1 percent year-on-year in January, helping to offset trade risks.
What caused slowdown and what will drive recovery?
The report notes that slowdown in India's economy could be due to "unexpected double tightening of fiscal and monetary policy." Policymakers, the report notes, usually take such measures in emerging economies when there are micro imbalances such as rising inflation, widening of current account deficit or significant increase in private debt to GDP.
The global major believes that India is well on its way to recovery. According to the report, India’s economy is expected to gain momentum due to a combination of factors. Government capital expenditure is also projected to grow by 10.1 percent in FY2026, while total capital expenditure, including grants to state governments, is expected to rise by 17.4 percent.
Additionally, monetary policy easing is already underway, with the Reserve Bank of India (RBI) cutting policy rates and injecting liquidity. Another factor in favour of recovery is that the weighted average call rate has declined by 43 basis points since December 2024, helping improve financial conditions. Food inflation has also dropped from 10.9 percent in October 2024 to 6 percent in January 2025, which could boost household purchasing power.
What is next for consumption and capex?
The report notes that government capital expenditure has shown strong recovery growing at 67 percent year-on-year on a three-month moving average in January 2025. Additionally, the central government’s FY2026 budget plans to increase capital expenditure to 4.3 percent of GDP, while total public sector capex, including state-level spending, is expected to grow 17.4 percent. However, the report notes that private sector investment remains sluggish due to global uncertainty.
On the consumption side, private consumption has seen steady growth of 6.9 percent YoY in Q4 2024, driven by improved rural demand and tax cuts worth Rs 1 lakh crore. Similarly, FMCG volume growth reached 7.1 percent in Q4, compared to an average of 3.5 percent in Q2 2024 and Q3 2024. Another factor in favour of consumption is the improvement in job market. Lastly, lower inflation is expected to further support real income growth and expand the consumption recovery.
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