Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist.

Today I’ll be taking a look at the Indian economy amidst escalating trade tensions in Asia and around the globe.

It’s Thursday, March 13, at 2 PM in Hong Kong.

Over the last few months, investors have been skeptical about India’s growth narrative. Investors – like us – have been caught off-guard by the surprising recent slowdown in India’s growth. With the benefit of hindsight, we can very clearly attribute the slowdown to

an unexpected double tightening of fiscal and monetary policy.

But India seems to be on its way to recovery. Green shoots are already emerging in recent data. And we believe the recovery will continue to firm up over the coming months. What makes us so confident in our outlook for India?

We see several key factors behind this trend:

First, fiscal policy’s turning supportive for growth again. The government has been ramping up capital expenditure for infrastructure projects like roads and railways, with growth accelerating markedly in recent months. They have also cut income tax for households which will be effective from April 2025.

Second, monetary policy easing across rates, liquidity, and the regulatory front. With CPI inflation recently printing at just 3.6% which is below target, we believe the central bank will continue to pursue easy monetary policy.

And third, moderation in food inflation will mean real household incomes will be lifted.

Finally, the strength in services exports. Services exports include IT services, and increasingly business services. In fact, post-covid India’s had very strong growth in business services exports. And the key reason for that is, post-covid, I think businesses have come to realize that if you can work from home, you can work from Bangalore. India’s services exports have nearly doubled since December 2020, outpacing the 40% rise in goods exports over the same period. This has resulted in services exports reaching $410 billion on an annualized basis in January, almost equal to the $430 billion of goods exports. Moreover, India continues to gain market share in services exports, which now account for 4.5% of the global total, up from 4% in 2020.

To be sure there are some risks. India does face reciprocal tariff risks due to its large trade surplus with the US and high tariff rates that India imposes select imports from the US. But we believe that by September-October this year, India can reach a trade deal with the US.

In any case, India’s goods exports-to-GDP ratio is the lowest in the region. And even if global trade slows down due to tariff uncertainties, India’s economy won’t be as severely affected. In fact, it could potentially outperform the other economies in the region.

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