Morgan Stanley's 10 + 10 Analysis On Why It Is Totally Bullish On India

29 Jun 2023 12:00 PM GMT
On today's episode, financial journalist Govindraj Ethiraj talks to Bhaskar Rao P, MD of the 100-year old Orient Exchange and General Secretary of the All India Money Changers and Money Transfer Agents Association as well as Ashok K Bhattacyara, editorial director and columnist at Business Standard.

  • <01:24> Morgan Stanley's 10 + 10 analysis on why it is totally bullish on India.
  • <07:25> The 20% presumptive tax on international credit card is kicking in soon.
  • <15:24>And hmm..former Chief Economic Advisor Kaushik Basu raises a small social media storm when he says that India grew below potential at 3.28% between 2020-23.
  • <21:49> Mumbai is heating up and power demand hit an all-time high of close to 4,000 MW.



NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Good morning, it's Friday the 2nd of June and I'm Govindraj Ethiraj with The Core Report, coming to you from Mumbai, India's financial capital and most rocking city in the world.

Now, here are our two quick reports and theme, the 'Hmm' section and 'Conversations of the Day,' where we grapple with more fallouts of the upcoming presumptive tax on travelling Indians and ask, which GDP number is the right one?

Morgan Stanley's 10 + 10 analysis on why it is totally bullish on India.

The 20% presumptive tax on international credit card is kicking in soon. The head of the country's top foreign exchange dealership association tells me there is a serious and discriminatory lacuna.

Mumbai is heating up and power demand hit an all-time high of close to 4,000 MW.

And hmm... former Chief Economic Advisor Kaushik Basu raises a small social media storm when he says that India grew below potential at 3.28% between 2020-23. What indeed is he referring to, I ask Ashok K Bhattacharya, Business Standard editorial director, columnist and wizard in simplifying India's economic data.

Morgan Stanley Goes More Bullish

Investment Bank Morgan Stanley has put out a very bullish report on the Indian economy titled 'How India Has Transformed In A Decade', highlighting mostly the key economic achievements of the current BJP government.

The report is insightful for what it presents and more importantly sums up. None of the 10 changes Morgan Stanley highlights are unknown to a serious particularly portfolio or direct investor but seeing them together provides some context.

Morgan Stanley, somewhat unusually for a large portfolio investor, manages around $1.3 trillion of assets. It complains about the scepticism India receives from overseas investors and points out that these views ignore the significant changes that have taken place in the country, particularly since 2014, being of course the arrival of the BJP and Narendra Modi Government.

In 10 years, Morgan Stanley says, I reckon it means nine, India has gained positions in the world order with significant consequences for the macro and market outlook.

Let me run through the headlines of what the changes are and the outcome of these changes all summarised nicely by Morgan Stanley of course.

Before I come to the changes, I was looking to see if there were any risks the banker could see. After some searching I found them. The key risks are:

A global recession, a fragmented general election outcome in 2024, a sharp rise in commodity prices due to supply outages and shortages in skilled labour supply.

Put differently, the word risk appears once in the 34-page report and that was here.

The tone, overtone and undertone are of course bullish. So let's move on.

The 10 are:

1. Supply-side Policy Reforms
2. Formalisation of the Economy (Reference to GST)
3. Real Estate (Regulation and Development) Act (Actually an important one somehow not much referred to)
4. Digitalizing Social Transfers
5. Insolvency and BankruptcyCode
6. Flexible InflationTargeting
7. Focus on FDI (though falling now)
8. India's 401(k) Moment (mutual fund investments, quite true)
9. Government Support for Corporate Profits (yes, its down)
10. MNC Sentiment at Multiyear High

The 10 Implications

Manufacturing and capex as % of GDP to increase steadily: MS says it expects a new cycle in manufacturing and capex, as we estimate the share of both to rise in GDP by approximately 5ppt by 2031.

Export market share to double: We estimate that India's export market share will rise to 4.5% by 2031, nearly 2x from 2021 levels, with broad-based gains across goods and services exports.
This is in 10 years and while perhaps technically possible is pretty stiff.

A major shift in the consumption basket: As India's per capita income increases from US$2,200 currently to about US$5,200 by F2032, this will have major implications for change in the consumption basket, with an impetus to discretionary consumption.

Lower volatility in inflation and shallower interest rate cycles: We expect inflation to remain benign and less volatile, which would imply shallower rate cycles.
Shallower rate cycles could also imply more benign equity market cycles.

The benign trend in current account deficit: We believe India's structural transformation will feed into the saving-investment dynamics, implying gains for its external balance sheet, with a progressively narrower trend in the CAD.

A profit boom: The share of profits in GDP has doubled from all-time lows hit in 2020 and are set to rise further – maybe even double from here – leading to strong absolute and relative earnings.

This explains India's apparently rich headline equity valuations. Triggered by supply-side reforms by the government, we expect a major rise in investments, a moderation in the CAD and an increase in credit to GDP to support the coming profit growth.

Lower correlation with oil prices: Lower share of foreign portfolio (FPI) in current account funding has reduced the stock market's negative return correlation with oil prices, especially when oil prices rise due to supply disruption.

Lower correlation with US recession: As India's reliance on global capital market flows has reduced, the market's sensitivity to a US recession and US Fed rate changes also seems to be fading.

Valuation re-rating: This reflects persistent domestic demand for stocks and higher growth for longer. India is trading at a premium to long-term history, albeit well off highs and in line with recent history.

10. India's beta to EM has fallen to 0.6: This is a consequence of improved macro stability and reduction in dependence on global capital market flows to fund the CAD.

There you are:

And how many people may never claim the promised refunds on India's new travel tax

A 20% presumptive tax on international spending will kick in fully from July 1. In this form, India is perhaps the only country in the world that will impose a tax on expenditures by its citizens travelling overseas.

India has a $250,000 limit for its citizens sending money overseas. Earlier, credit card spending was not covered under this limit. Now they are because the government fears people are blowing through their credit card limits to the point that this limit is being breached or at least that's how it sounds.

More importantly, the first serious glitches and hitches are already emerging.

If you are a business traveller or a holiday traveller with a credit card and you stay within the Rs 7 lakh limit per year you should be fine. The other exemptions are for education and health.

But on the other hand, if you are a person moving to another country for a typically blue-collar job, then you will pay 20% tax on the $500 and $1,000 that you will convert from rupees.

There is almost no way you will return to India or even think about collecting it back from local tax authorities as a refund at the end of the year which you are entitled to or to be netted off against income.

I posed this question against the backdrop of this new guideline to Bhaskar Rao P, MD of the 100-year-old Orient Exchange and also General Secretary of the All India Money Changers and Money Transfer Agents Association. Mr Rao has been arguing that common people use cash, prepaid forex cards and wire transfers while the better off use credit cards.

Hmm... Which India Growth Number Should You Believe?

Most economists have cheered the 7.2% GDP growth rate number for 2022-23 for India.

The last quarter of the same financial year was a bigger surprise with GDP rising 6.1% GDP. While for various reasons including global headwinds, the current year may not be strong, there is a question, if only for academic reasons where we stand versus where were before Covid 19 hit in 2020?

Kaushik C Basu, former chief economic advisor to the Government of India and now a professor of economics and international studies at Cornell University, said, that India's 7.2% growth in 2022-23 looks good but disappoints when you realise growth in 2020-21 was -5.8% (one of world's lowest), causing the baseline from where India's growth is computed to drop. India's annual growth over 2020-23 is 3.28%-too low for a nation with so much talent.

I caught up with Ashok K Bhattacyara, editorial director and columnist at Business Standard and a whiz at all things Indian economy.

By most

Powering Away

Mumbai has hit a peak power demand of almost 4,000 MW, as temperatures surged and humidity rose in the city on Wednesday.

Temperatures hit a high of 34 degrees Celsius but usually felt higher.

The highest load was at 3:30 pm when it peaked at 3,968 MW, stood there for 15 minutes or so and then began dropping.

The load triggered power cuts in various parts of both the western and eastern suburbs of the island city.

Earlier, the highest demand was recorded on April 19 at 3,893 Mw.

To put this number in context, Delhi hits a peak power demand of close to 8,000 MW or twice as much as Mumbai in summer. This happened last summer.

This is obviously worrying for a lot of reasons and I bring this up more to leave something for all of us to think about as our own consumption of cooling devices and devices increases and we are also grappling with the outcome of all this fossil fuel burning.

Have a great Friday and weekend ahead.

Updated On: 2 Jun 2023 12:30 AM GMT
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