Morgan Stanley lowers India’s Q2 GDP forecast, expects growth to stabilise at around 7%

Early Q2 data for India showed weaker performance in areas like Nifty earnings forecasts, Index of Industrial Production (IIP) and goods and services tax (GST) collections. This led the Reserve Bank of India (RBI) to slightly lower its Q2 gross domestic product (GDP) growth forecast, reducing it from 7.2% to 6.8%.

However, RBI Deputy Governor Michael Patra recently reassured that the RBI still expects India’s economy to grow by 7.2% for the full year, maintaining a positive outlook for the coming years with a forecast of 7% for FY26 and around 8% growth beyond that.

Business leaders, including Rajiv Bajaj of Bajaj Auto and the management of TVS Motor, also reported strong festive demand, adding to the optimistic view.

In a discussion with CNBC-TV18, Chetan Ahya, Chief Asia Economist & Emerging Markets at Morgan Stanley, Santanu Sengupta, India Economist at Goldman Sachs and Vishrut Rana, Economist for Asia Pacific at S&P Global Ratings discussed at length how the Indian economy will perform in Samvat 2081.

Below is the verbatim transcript of the discussion.

Q: There are two-quarter data which we can whine and crib over, and there is a big statement coming from no less than the Reserve Bank of India – we stand by our 7.2% growth. Where are you? Do you still think Indian growth can be robust this year?

Ahya: We are at 7% and so we are a tad lower than RBI’s forecast we also think that when you take the account the Q2 number, when it comes out, the gross domestic product (GDP) number could be lower than what we had initially anticipated. We thought it would be 7% as well. But now we are recognizing that there has been some downside risk that has emerged to that quarter’s number, and going forward, we are forecasting that growth will revert to somewhere around 7% in the next two quarters, and then decelerate towards 6.5-7%. So, that is the kind of our growth outlook.

Also Read | Rajiv Bajaj projects FY25 sales could reach 4.7 million as exports gain momentum

Q: What is your sense? Does this positive statement from Patra and people like Rajiv Bajaj and TVS Motors want you to rethink your second-half numbers?

Sengupta: We have been at 6.5% growth for FY25 for about two months now. We downgraded growth a couple of months back. The reason then, mainly, was that the government capex spending had not come through. We had expected some recovery in the previous month. It has not. Possibly it is going to recover in the second half, and therefore you are going to get a boost from government capex, undoubtedly. But given how far it is from the budgeted estimates, we have our doubts whether they will be able to meet their full year’s numbers. You have seen it in the previous couple of years as well. You budget for about ₹10 trillion, you end up spending about ₹9.5 trillion. You have budgeted for ₹11.1, so you will probably end up spending a little bit lesser.

But two other broader macro factors are going on. There is a slowdown that we are seeing in the urban consumption landscape. There is a nascent recovery in rural but the offset is coming from urban as well. Credit card spending data is slowing, there has been a macro-prudential tightening from the RBI almost a year back, and it is playing out now. So, your retail credit growth has slowed down from about 25-30% towards the mid-teens, and possibly it will slow down more.

So, when you are tightening macro prudential at the same time that has been a very strong lever of growth that is going to subdue consumption in our view. There is a fiscal drag that is going to continue into next year as well and then you think about the world can’t imagine a net export material boost coming. And therefore, we are happy to be at 6.5% growth for FY25.

Q: The world is not that bleak. The last GDP number we got from the United States is 3% for such a large economy, July-August-September, actual numbers, not even forecasts, is 3%. China is giving a big boost. So, do you think there is an upside? What is your number and what is the likely upside tilt, if any?

Rana: I guess we fall somewhere in the middle and towards what you were describing earlier in terms of the macro scenarios. So, we forecast 6.8% growth for this fiscal year (FY25), and part of the reasons have been discussed already. We do see some slowdown in the high-frequency momentum in the economy. There is, of course, a strong base from last year where growth was fairly strong as well.

Also Read | TVS Motor Q2 results: Revenue and profit rise to highest ever in Sept quarter but miss estimates

Over the medium run, we remain positive for the factors that you mentioned that there is this supportive global growth environment. In addition, the domestic growth drivers are still in place for India, the capital expenditure, the infrastructure drive, crowding in private investment, the demographic story, and technology, all of those factors supporting India’s growth momentum over the medium run and we believe that that could push growth into the 7% range at the moment. And as you said, at the moment, external factors remain reasonably steady.

Q: If you can parse the global environment, you look more seriously at China than many economists. With all this fiscal push, will you see some recovery over there, and will that change the global picture at all?

Ahya: We think the thing, the policy response that the Chinese government has announced so far is good. It’s significantly positive, but it is unlikely to be a major driver for global growth. We think it is going to achieve somewhere closer to 5% GDP growth, but that is not going to be a 0.5% or 1% acceleration from what everybody else was expecting before this policy announcement. So, it is more like the status quo, and we read the policy actions more as defensive trying to prevent further slowdown in growth and a drag on global growth rather than a big contributor.

But as you mentioned earlier the US is doing well, so the US growth is going to help the global economy, and on balance, we should see global growth around 3.1% and that is already our forecast for this year as well as next year. So, the global side is stable, but I would not say that there is a significant positive tailwind coming from the global side.

Q: How worried would you be as the food inflation number was bad, and October nowcast is not looking any better.

Sengupta: I think that is going to be the overshoot from where our estimates are for the current quarter given the upside that we have seen in vegetable prices. But these things tend to revert pretty quickly. So, post-December, as you get into the winter season, you are probably going to see a sharp correction in vegetable prices which would align with inflation because you mentioned Dr Patra’s speech earlier. He has also said that it will probably align with the RBI’s inflation target in the Q1 calendar year, next year, and thereafter, in FY26. That is exactly how we are seeing it.

So, some upside risk to around the 4.5% number that we have for the current quarter. It will probably push closer towards 4.8 or so, which is the RBI’s forecast and then you revert towards 4.2-4.3. I think the main point is that if you strip out vegetables, headline inflation is running at 3.5% and it has been running below 4% for the whole of this calendar year. Core inflation is running at around 3.5%. So, keeping aside vegetables, there is no strong inflation impulse that we are seeing in the economy.

Q: What can mar the picture? a possible Republican victory. Does that topple things a lot for India or India can still chug along?

Rana: In terms of the external risk factors, there is a number that stand out. One of them would be, of course, a global change in the financial conditions. So, what we have seen over the past couple of years is that financial conditions remain very stable. It is easy for firms to access capital markets and the funding markets. And if that does change because of financial shocks or because of rising interest rates globally then that does present a complication to a growth outlook.

In terms of wider growth momentum, we would see the Asia Pacific, and China growth numbers as well slowdown in the US, all being potential factors that could affect the Indian economy from the external side.

For the entire discussion, watch the accompanying video

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