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Informist, Tuesday, Apr. 15, 2025

 

NEW DELHI – Morgan Stanley has cut its forecast for India's GDP growth in 2025-26 (Apr-Mar) by 40 basis points to 6.1%, and sees the economy expanding at only a slightly faster pace of 6.3% the next financial year. The American investment bank previously expected India's GDP to grow 6.5% in both FY26 and FY27.

 

The growth downgrade comes amid the uncertainty caused by the US' tariff war, which is expected to exert pressure on external demand and business sentiment and depress the investment cycle. Last week, the Reserve Bank of India had cut its own forecast for growth in FY26 by 20 bps to 6.5%, which economists widely consider to be optimistic. The six-monthly Monetary Policy Report of the Indian central bank sees GDP expanding 6.7% in FY27.

 

"India's growth cycle has been on a gradual cyclical recovery following a partially policy-induced slowdown in 2HCY24 (Jul-Dec 2024). As such, high-frequency data are improving from the trough in QE September 2024 (Jul-Sept); however, the trend is not indicative of a broad-based recovery," Morgan Stanley economists led by Upasana Chachra said in a note Monday. While Morgan Stanley expects India's GDP growth to have increased for the second quarter in a row to 6.7%--well below the 7.6% implied by the statistics ministry's second advance estimate of 6.5% growth in FY25--capital expenditure by the private sector "remains weak".

 

On the tariff front, even though the US has delayed reciprocal tariffs on all countries except China by 90 days, the changes in the policies pose uncertainty, which will drag down business sentiment. "In our base case, we assume that India and US will be able to conclude and implement a bilateral deal over the next few months. However, to the extent tariffs between US and China remain at elevated levels, global growth and trade are likely to take a hit," Morgan Stanley said. This will have a second-order impact on India's growth, which Morgan Stanley said was a worry.

 

"The impact on India's growth cycle can be seen from the experience of 2018-19, when US-China trade tensions arose. India's overall exports declined 0.2% year-on-year in 2019 versus +13% in 2017 (before US-China trade tensions in President Trump's first term). Not only exports, India's overall capital goods imports--which can be tracked as a proxy for capex--also contracted 3.2% year-on-year in 2019 versus +5.9% in 2017. Further, industrial production growth also moderated to 0.7% in 2019 from 3.5% in 2017," Morgan Stanley said.

 

With growth expected to be weaker due to the direct and indirect impacts of the US' trade policies and inflation lower, Morgan Stanley thinks the RBI's Monetary Policy Committee will follow up its two repo rate cuts from February and last week with another 50 bps of easing in 2025. However, a larger than anticipated hit to growth would "likely lead to more easing by the RBI and potentially a pause in the fiscal deficit consolidation for FY26". The Indian government aims to reduce its fiscal deficit in the current financial year to 4.4% of GDP before its debt-to-GDP targets kick in from next year.  End

 

Reported by Siddharth Upasani

Edited by Avishek Dutta

 

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