Morgan Stanley on Outlook for India -2006

While it is fashionable to be bullish about the growth of Key countries in Asia, Morgan Stanley takes a cautious view about the outlook for India in 2006. An acceleration in GDP growth over the last two years to 7% pa has been one of the key factors focusing investors’ attention on India. Although we have been positive on India’s long-term growth outlook, we believe that the recent acceleration in growth was driven largely by cyclical external stimulus. Given that these favourable global factors now appear to be reversing, we believe India will face a pullback over the next 12 months in the form of a slowdown in growth and tightening liquidity conditions. A large part of the recent growth in industrial production and to a lesser extent services sector growth has been driven by cyclical global factors. This strong global liquidity spillover into India has allowed the government to pursue relatively loose monetary and fiscal policy, pushing domestic consumption growth to a new high. Acceleration in consumption growth has largely been driven by a rise in borrowing rather than income growth. India’s share of goods exports to the US has not seen any significant improvement over the past two years, and therefore most of the acceleration in India’s export growth appears to be largely a reflection of the demand cycle - this is important as asian economies are in general dependent on exports to US.The report also says china is about to suffer from an export fatigue. Although the Indian economy continues to benefit from relatively low global interest rates and stronger global GDP growth, the government has cushioned the economy from the attendant cost of higher oil prices.