While the US, UK and EU are braving the twin problem of high inflation and negative growth, Morgan Stanley says India's prudent fiscal policy has paid off. In 2022-23, India's growth will average 7%, the strongest among the largest economies, contributing 28% and 22% to Asian and global growth, Morgan Stanley said in a report.
India is best positioned within Asia to deliver domestic demand alpha, Morgan Stanley said, adding that its structural factors will sustain its cyclical recovery. The recent strong run of data increases Morgan Stanley's confidence that India is well positioned to deliver domestic demand alpha, which will be particularly important as developed markets' growth weakness percolates into Asia's external demand.
The report notes that some observers have argued that global misery was set into motion during Covid-19 when the governments in these countries went on a massive spending spree to give economic stimulus, pushing inflation at a time when growth was slowing, while the Russia-Ukraine war aggravated the crisis in the West. They say that the so-called economists were "pushing" India to follow the same path that these western countries took.
The observers recall that some were glorifying the US's $ 3200, Germany's stimulus and the UK's furlough scheme, trying to create dissatisfaction among the Indian public and pushing the Indians to demand something similar.
Eminent international economists were putting pressure on the Indian government to spend 5%, 10% or even 15% of the entire GDP as a stimulus. Other economists provided other varying and large amounts to be distributed without worrying for inflation.
In spite of repeated pressures from "fancy economists", intelligentsia, and freeloaders, the government in India was fiscally prudent and knew the dangers that uncontrolled inflation can wreak on the Indian economy and public. It repeatedly prioritised very careful spending and targeted stimulus only to those sections that desperately required it.
Observers argue that today, India is the only large country that is not only at the minimum risk of inflation but that also exhibited a growth of 13% this quarter. The union government under the economic adviser Sanjeev Sanyal repeatedly maintained the stand of fiscal prudence and provided stimulus to boost the economy at the "right time" and to "appropriate groups". Even Arvind Panagariya was in favour of government policies to maintain fiscal prudence.
Observers say that strategy has paid off in a huge way. The fancy economists and intellectuals were prescribing policies to India that have now spelt doom for the west. Fortunately, the team of economists under the government of India assessed the situation much better and did not cave into the immense pressure.
Experts say that with passing time, more and more evidence, as well as consensus, is emerging that mindless stimulus did more harm in the long run even in those large economies which were fiscally surplus before the pandemic or were highly advanced.
Morgan Stanley said the key change in India's structural story lies in the clear shift in the policy focus towards lifting the productive capacity of the economy. Policymakers have taken up a series of reforms which will catalyse an upswing in the private capex cycle, helping to unleash a powerful productivity dynamic, leading to the onset of a virtuous cycle.
The economy is lifting off cyclically after a prolonged period of adjustment. The backdrop of healthy balance sheets and rising corporate confidence bodes well for the outlook for business investment, the report said.
The biggest challenge that was emerging to India's macro outlook was the sharp spike in oil and commodity prices weighing on macro stability. However, with the 23-37% decline in oil and commodity prices since the March 22 peak, we think that macro stability indicators will head back towards the comfort zone.
Against this backdrop, we project that RBI does not need to lift rates deeply into restrictive territory. In other words, RBI will not need to slow domestic demand growth meaningfully to control macro stability indicators, Morgan Stanley said.