India's Transformation: Morgan Stanley's Report

• 03 Jun 2023

Why in News?

A recent report by Morgan Stanley (global financial services firm) highlights the significant changes that have taken place in India over the past decade.

• The report challenges the skepticism surrounding India's potential and emphasizes the transformative reforms implemented in recent years.
• Morgan Stanley counters global opinions of India's underperformance. It emphasizes India's growth as the second-fastest-growing economy and top-performing stock market.

What are the Key Highlights of the Report?

• Significant Growth Drivers:
  • Supply-Side Policy Reforms:
    • Bringing corporate tax at par with other countries.
    • Acceleration of infrastructure investment.
  • Formalization of the Economy:
    • Rising collection of Goods and Services Tax (GST).
  • Implementation of the Insolvency and Bankruptcy Code.
  • Introduction of flexible inflation targeting.
  • Focus on foreign direct investment (FDI).
  • Government support for corporate profits.
  • Digitalizing Social Transfers.
  • Real Estate (Regulation and Development) Act .
  • Multi-year high sentiment among multinational corporations (MNCs).
  • India’s 401(k) Moment.

Note:
India’s 401(k) Moment:

• India’s 401(k) moment is the term used by Morgan Stanley to describe moment refers to the increase in household savings and investments in financial assets, inspired by the US 401(k) retirement savings plan.
• This shift reflects a change in household preferences from physical assets like gold and real estate to financial assets like equities and bonds.
• Key financial assets involved in India's 401(k) moment include mutual funds, insurance, and pension schemes.

• Economic Indicators:
  • Manufacturing and capital spending as a percentage of Gross Domestic Product (GDP) have consistently risen.
  • Export market share is projected to double to 4.5% by 2031(from 2021 level).
  • Lower volatility in inflation and shallower interest rate cycles has impacted consumption patterns.
• Future Outlook:
  • Anticipated rise in manufacturing and capital spending in GDP.
  • Expected broad-based gains in goods and services exports.
  • Per capita income is projected to increase and implications for discretionary consumption.
    • It is expected to clock in at $5,200 within the next decade.
  • Structural transformation contributing to a narrower current account deficit (CAD).
  • Doubling of profits in GDP, resulting in strong earnings growth.
• Implications on Stock Market:
  • There is a possibility of higher valuations for domestic shares, which could lead to increased investment opportunities.
  • The demand for stocks within India is expected to remain strong, contributing to sustained growth in the market.
  • India's reduced dependence on global capital flows may contribute to a more stable stock market, with less vulnerability to international market fluctuations.
    • The stock market may become less influenced by changes in oil prices and the US recession.
  • India's beta to emerging markets falling to 0.6, which is a consequence of reduced dependence on global capital market flows.

Note:

• Beta:
  • Beta is a measure of systematic risk, also known as market risk or non-diversifiable risk. It quantifies how sensitive a stock's returns are to changes in the broader market.
  • A beta of 1 indicates that the stock tends to move in line with the market, while a beta greater than 1 suggests the stock is more volatile than the market.
    • A beta less than 1 indicates the stock is less volatile than the market.

• Anticipated Key Risks:
  • Global recession.
  • Sharp rise in commodity prices and supply outages.
  • Shortages in skilled labor supply.

UPSC Civil Services Examination, Previous Year Question (PYQ)

Prelims

Q. In the context of finance, the term “beta” refers to (2023)

(a) the process of simultaneous buying and selling of an asset from different platforms
(b) an investment strategy of a portfolio manager to balance risk versus reward
(c) a type of systemic risk that arises where perfect hedging is not possible
(d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market

Ans: (d)

Source: FE