Morgan Stanley
  • Research
  • Aug 3, 2016

India’s Next Growth Cycle Is Happening Now

As its recovery broadens, India is transitioning from quality to growth, driven by domestic consumption and public spending on infrastructure, with clear benefits for three key sectors.

India, long overshadowed by China on the global economic stage, is getting ready for a star turn.

In a season of global uncertainty underlying expectations for slower growth worldwide, India is bucking the trend and building on steady economic momentum, according to Morgan Stanley’s economists, who recently raised their India growth forecasts for this year and into 2017.

Taking that macro outlook and applying it at the market’s micro level, what does it mean for investors? “Quality has been very popular since the global financial crisis, but as India's growth turns in the coming months, we see the market rewarding growth more fervently,” says Ridham Desai, Morgan Stanley’s Head of India Research and Equity Strategy. That growth will be anchored by two key factors, domestic consumption and government infrastructure spending, with implications for three sectors: private sector retail banks, consumer discretionary, and industrials.

Here’s a look at each sector’s potential:

Private Sector Retail Banks: Retail loan growth is strong and at multiyear highs in both real and nominal terms. Desai expects this growth to stay strong, as households, most of which have healthy balance sheets, borrow more. This should counterbalance the lack of corporate borrowing. Other sector advantages include the steady accretion to wealth among households over the past decade and likely market share gains in private loans, at the expense of India’s capital-starved state-owned banks.

Consumer Discretionary: Recent indicators are pointing to a broadening of the growth recovery from public capital expenditures and foreign investment flows to discretionary consumption. “In our view, consumption recovery will accelerate in the next 12-18 months,” says Desai, who highlights five key factors that will help sustain the recovery:

  1. sustained fall in inflation and improvement in purchasing power;
  2. trailing monetary policy easing and expectation of more easing;
  3. pay commission-related wage hikes for government employees;
  4. pick up in job growth;
  5. potential improvement in the rural sector, as the weather turns supportive.

“We expect consumption growth to pick up from around 6% [estimated] in March 2016 to 6.8% in March 2017,” Desai says, adding: “We think Consumer Discretionary could be one of the best places to park money in the coming months.”

Industrials: Private capital expenditure remains weak, due to low capacity-utilization, over-levered corporate balance sheets, sluggish global growth and, therefore, weak exports; however, the government has been increasing public capex and, more importantly, executing well across a number of projects, including road construction, railroad upgrades, and other long-term infrastructure improvements, such as coastal transportation. This uptick in government capex is likely to lead to better order books and earnings for industrials engaged in these activities.

For Morgan Stanley Research on the macroeconomic and strategic outlook for India, ask your Morgan Stanley representative or Financial Advisor for the full report, “India Macro Meets Micro: The Charm of Compounding,” (Jul 24, 2016) Plus, more Ideas.