M

February 15, 2023 05:17 PM GMT

India Economics | Asia Pacific Morgan Stanley India Company Private Limited+
Idea

Upasana Chachra
Chief India Economist

Debating the Growth Outlook Upasana.Chachra@morganstanley.com

Bani Gambhir
+91 22 6118-2246

Economist
Bani.Gambhir@morganstanley.com +91 22 6118-3027

Mixed trends in high-frequency domestic demand data coupled

with a slowdown in external demand have led to fears of an Exhibit 1 : Trend in Quarterly GDP
impending growth slowdown. We highlight that drivers of 25%
MSe
20.1%

domestic demand remain intact and that data are evolving in line 20%

15% 13.5%

with our expectations. 10%

5% 2.8% 2.5%
8.4%
5.4%
4.1%
6.3%
4.4% 4.7%
7.0% 6.8% 6.4%

0.7%
0%
Consensus GDP growth estimates for F24 are at 6% – we're at 6.2%: We put our -5%
YoY for Dec-22 and Mar-23
framework for the growth outlook in the context of fears of an impending -10% -6.6% likely to moderate due to base
effect
-15% Real GDP, YoY%
slowdown. We reiterate our view that domestic demand is likely to sustain the -20%

growth momentum. -25% -23.8%

Jun-20

Jun-21

Jun-22

Jun-23
Dec-20

Dec-21

Dec-22

Dec-23
Mar-20

Sep-20

Mar-21

Sep-21

Mar-22

Sep-22

Mar-23

Sep-23
We answer the following FAQs regarding India's growth outlook: Source: CEIC, Morgan Stanley Research, Morgan Stanley Research
Estimates

1. Do the recent high-frequency domestic demand data indicate a slowdown?

2. Will consumption sustain the recovery?
3. What will drive an improvement in rural demand?
4. Are capex data turning? What will drive a durable capex recovery?
5. What is the impact of global conditions on growth?
6. What are the risks to our view?

Our framework to assess the growth outlook: The high-frequency growth data
have been mixed in the last quarter, with some signs of slowdown in YoY growth. A
combination of base effect and distortions from festivals, which led to bunching up
of demand and loss of production days to holidays, affected the trends in the
quarter ending December. Incoming data for January have shown an improvement
both in YoY and sequential terms. Further, we are building in a moderation in GDP
growth (YoY) in 2HF23, driven by base effect and reversion of sequential
momentum in activity to a normalized trend.

In this context, we believe that the trends in incoming data are consistent with our
view of GDP growth at 6.2% in F24. In our view, the factors which will lead to a
healthy growth trend this year are: full economic reopening in 2022, which is
leading to a cyclical recovery in consumption; pickup in private capex with healthy
balance sheets in the private corporate and financial sector; and acceleration in
government capital spending.

We believe that the key for sustained domestic demand is a pickup in capex, which
will help create more jobs, thus leading to a virtuous cycle of more jobs → higher
income → higher saving → higher investment.

Risks to our view stem from external factors – i.e., depth and duration of global
growth slowdown and implications for capex recovery, along with changes in
commodity prices and capital flows with implications for macro stability and
domestic policy.

For important disclosures, refer to the Disclosure Section,

located at the end of this report.
M
Idea

Do the recent high-frequency domestic demand data

indicate a slowdown?
In our view, incoming high-frequency data reflected a moderation (in the QE December)
driven by base effect and shift in the festival calendar rather than a slowdown. Indeed,
incoming data on high-frequency indicators have gained momentum both in YoY and MoM
terms in January.

The trend is thus encouraging after these indicators exhibited mixed signs, with some of
them slowing in YoY terms in QE December 2022 after peaking in QE September 2022,
driven by the impact of shift in festival dates on growth rates.

As such, while the aggregate domestic activity tracker accelerated to 8.1% in January from
4.8% in December in YoY terms, it improved to a 10-month high of 4.6% on a sequential
basis.

We expect GDP growth (YoY) to moderate in 2HF23 from QE Sep-22 levels, driven by
base effect and as sequential momentum in activity reverts to a more normalised trend.

We also note that real growth for high-frequency indicators remains better than pre-
pandemic growth trend.

We elucidate the following trends by component in high-frequency indicators vs. pre-

pandemic growth range:

• Real GST collections are tracking at 6.2% in the three months ending Jan-22 vs.
0.7% in QE Dec-19
• Real corporate revenue growth is tracking at 6.1% in QE Dec-22 from 3.4% in 2019.
• Credit growth is tracking at 16.4% in Jan-23 vs. 8% in QE Dec-19.
Further, real credit growth is at 9.9% in Jan-23 vs. 5.2% in QE Dec-19.
• PMI manufacturing has averaged 56.3 in the three months ending Jan-23 vs. 51.5 in
QE Dec-19.
• PMI services has averaged 57.4 in the three months ending Jan-23 vs. 51.7 in QE
Dec-19.
• Passenger vehicle sales growth is at 17.5% in the three months ending Jan-23 vs. -
5.3% in QE Dec-19.
• Two-wheeler sales growth is at 8.8% in the three months ending Jan-23 vs. -15.1% in
QE Dec-19.
• Consumer non-durables production is at 1% in QE Dec-22 vs. -1.8% in QE Dec-19.

2
M
Idea

Exhibit 2: Tracking Economic Activity Exhibit 3: Trend in High-Frequency Indicators Improved in

120 30% January
110 20% Indexed, Feb-20 =100
Power GST Collections
100 180 E-Way Bills Rail Freight
10%
Exports Vehicle Registration
90 160 TW Sales PV Sales
0%
140
80
-10% 120
70
Domestic Activity Tracker, Indexed Feb-20 100
=100 -20%
60 80
Core GVA, YoY% (RS)
50 -30% 60
40
40 -40%
20
Jan-21

Jan-22

Jan-23
Mar-20

Jul-20

Sep-20

Mar-21

Jul-21

Sep-21

Jul-22
Sep-22
Mar-22
May-20

Nov-20

Nov-21

Nov-22
May-21

May-22
0

Jul-20

Jul-21

Jul-22
Mar-21
Mar-20

Mar-22
Feb-20

Nov-20
Dec-20

Feb-21

Nov-21
Dec-21

Feb-22

Nov-22
Dec-22
Apr-20
May-20
Jun-20

Jan-21

Apr-21
May-21
Jun-21

Sep-21

Jan-22

Apr-22
May-22
Jun-22

Jan-23
Aug-20
Sep-20

Aug-21

Aug-22
Sep-22
Oct-20

Oct-21

Oct-22
Source: CEIC, Ministry of Power, MS Autos team, Haver, CMIE, Morgan Stanley Research. Note: The
Economic Activity Tracker is computed using CMIE unemployment, power, rail freight, real GST
collections, service and manufacturing PMI, real credit, two wheeler and passenger vehicle sales . The Source: Ministry of Power, CEIC, MS Autos team, Haver,Morgan Stanley Research
data is indexed to Feb-20 =100

Exhibit 4: Trend in Broad Market (ex energy financials) Exhibit 5: Real Corporate Revenue vs. Real Industry GVA
Corporate Revenue 60%
Real corporate revenue(ex fin,
50% energy) on WPI Uptick led by
Broad Market Corporate Revenue(ex energy fin)
40% Real Industry GVA low base effect
60%
Uptick led by
30%
low base effect
40% 20%
CY2019: 6.1%
10% 3.4%YoY
20% 0%
-10%
3Y-CAGR
0% -20%
CY2019:
YoY% 2Y-CAGR -30%
3.8%YoY
-20% -40%
Dec-16
Mar-17

Dec-18
Mar-19

Dec-19
Mar-20

Dec-21
Mar-22

Dec-22
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18

Sep-19

Jun-20
Sep-20
Dec-20
Mar-21
Jun-21
Sep-21

Sep-22
Jun-19

Jun-22
-40%
Mar-19
Dec-16
Mar-17
Jun-17

Dec-17
Mar-18
Jun-18

Jun-19
Dec-18

Dec-19
Mar-20
Jun-20

Dec-20
Mar-21
Jun-21

Dec-21
Mar-22
Jun-22

Dec-22
Sep-19
Sep-17

Sep-18

Sep-20

Sep-21

Sep-22

Source: Capitaline, CEIC, Morgan Stanley Research

Source: Capitaline, Morgan Stanley Research

Morgan Stanley Research 3

M
Idea

Exhibit 6: Tracking High-Frequency Indicators of Domestic Demand

Tracking for
YoY% Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23
Dec/Jan
Private Consumption
Consumer durables goods production -5.7 -1.9 -4.4 -9.7 -3.1 7.2 59.1 25.2 2.3 -4.4 -5.5 -17.8 5.3 -10.4
Domestic Two wheeler sales -34.4 -10.8 -21.1 -27.3 -20.9 15.4 255.3 24.0 10.2 17.0 13.5 2.3 17.7 3.9 5.0
Domestic Passenger vehicle sales -18.6 -13.3 -8.1 -6.5 -3.9 -3.8 185.1 19.1 11.1 21.1 92.0 28.6 28.1 7.2 17.2
Air passengers flown 71.2 59.1 -8.7 4.7 44.2 95.3 502.4 288.1 127.4 73.1 61.6 40.0 21.8 23.1
Personal Loans 11.6 14.3 11.6 12.3 12.6 14.7 16.4 18.1 18.8 19.5 19.6 20.2 19.5 19.6
Petrol consumption -0.7 4.0 -5.2 3.6 6.2 17.2 51.5 23.2 6.8 11.6 8.8 8.8 8.1 6.0 14.1
Naukri Job Speak 25.8 40.5 41.2 30.5 16.3 38.2 39.9 22.0 20.8 5.8 12.7 -2.7 42.9 4.3 1.6
Rural wages 5.5 5.2 4.7 4.9 4.6 4.7 4.7 5.0 5.1 5.2 5.1 5.5 5.7 6.1
Government Consumption
Govt. Revenue Spending (ex interest) 10.5 3.3 37.7 7.7 -25.7 3.2 23.9 -14.3 -27.7 -6.5 19.5 48.8 18.0 -12.3
Investment
Manufacturing PMI 57.6 55.5 54.0 54.9 54.0 54.7 54.6 53.9 56.4 56.2 55.1 55.3 55.7 57.8 55.4
Public Projects under implementation -0.8 -1.4 -1.0 -0.5 -0.0 0.5 1.3 2.1 1.6 1.0 0.4 1.5 2.6 3.7
Private Projects under implementation 6.5 7.9 8.7 9.4 10.2 12.2 12.0 11.8 12.3 12.7 13.1 10.6 8.2 5.7
Capital Goods Imports 21.9 9.5 4.8 -1.8 -3.2 -0.1 9.0 11.7 28.0 29.0 29.5 10.3 16.2 21.7
Core index growth 3.2 4.1 4.0 5.9 4.8 9.5 19.3 13.1 4.8 4.2 8.3 0.9 5.7 7.4
Medium & Heavy Commercial Vehicles 8.1 9.1 10.1 15.4 30.5 80.0 274.2 132.0 75.4 61.1 52.4 37.8 58.6 48.5
Cement production -3.6 14.2 14.1 4.2 9.0 7.4 26.2 19.7 0.7 2.1 12.4 -4.3 29.0 9.1
Steel demand 0.9 -0.6 3.8 5.6 4.1 2.5 15.1 3.3 7.5 5.8 7.7 6.5 11.7 9.2
Rail cargo 6.2 7.2 7.8 6.6 6.7 9.4 14.6 11.3 8.3 7.9 9.1 1.4 5.2 3.1
Air cargo 6.2 6.9 0.5 -2.8 0.3 2.3 13.8 13.9 6.1 -1.2 -0.5 -14.5 -2.3 -5.9
Industry credit growth 12.7 7.6 6.4 6.5 7.5 8.1 8.7 9.5 10.5 11.4 12.6 13.6 11.4 12.6
Diesel Consumption -7.6 1.6 -6.4 -0.7 6.7 7.8 31.6 23.7 8.1 13.1 13.5 5.4 19.3 6.5 12.7
FDI inflows 672.7 624.9 894.9 717.8 715.5 841.3 810.5 593.2 714.5 455.1 514.8 513.1 433.5
Others
GST 25.3 12.7 17.6 17.6 14.7 19.9 44.0 56.2 27.2 28.2 26.2 16.6 11.0 14.8 10.6
Bottom 10 percentile

Source: CEIC, RBI, CMIE, PPAC, Morgan Stanley Research Note: Data for MHCVs from the Morgan Stanley Autos Team

4
M
Idea

Will consumption sustain the recovery?

Private consumption constitutes ~59.3% of India's GDP, and is thus clearly the largest
source of domestic demand and key driver of growth.

With the economy having fully reopened, a cyclical recovery is underway in consumption,
with both goods and services gaining pace. Indeed, private consumption rose 9.7% YoY in
QE Sep-22 from 1.8% in QE Mar-22. On a three-year CAGR basis it rose to 3.6% in QE Sep-
22 from 3.3% in QE Mar-22.

The high-frequency data related to consumption have gained strength, such as retail loans,
PLI services, and air passenger traffic. However, auto sales growth has been volatile,
particularly two-wheeler sales.

We expect the following factors to support consumption

demand

Healthy household balance sheet with low level of debt and increase in saving vs. pre-
pandemic levels: India's household debt remains low relative to its per capita income
(18.4% of GDP in F2022), especially in comparison to other EM nations such as China,
Thailand and Malaysia. In addition, the improving trend in household financial savings,
which are tracking at 8.3% of GDP in F2022 (vs. 7.9% of GDP in F2019), is likely to be
sustained, which exhibits improvement in household balance sheet position.

Job market trends remain resilient – job growth in non-IT sectors is offsetting
slowdown in IT hiring: On-ground data reflect that labour market conditions have
normalised substantially. The Naukri job index, which can be treated as a proxy for jobs
created in the formal sector, grew 22.7% in CY2022 vs. 10.4% in CY2019 (pre-pandemic).

There has been a slowdown in the IT sector (partially reflecting a high base), which grew
5.5% on a three-month trailing basis as of Jan-23.

However, the weak trend in IT sector hiring has been offset by the strength in non-IT
hiring, which recorded growth of 33.5% for three months ending Jan-23. Hiring in non-IT
sectors is being led by insurance, oil & gas, and contact-intensive sectors such as hotels,
restaurants, and airlines sectors.

Further, even as IT and related hiring has slowed and there is newsflow regarding job cuts
in some of the Internet-related start-ups, the share of overall IT/ITES in employment is
only 0.6%, while it accounts for 1.6% of the services-related labour force as of Dec-22.

We thus highlight that the slowdown in IT and related hiring is coming off a high base
(growth of 66% in CY21, 22.6% in January-September 2022), and given its small share in
the overall labour force, it is unlikely to create a meaningful slowdown.

In our view, the more decisive trend will be the positive spillover effect of the improved
trend in capital spending, which will create the virtuous cycle of productive growth
through its multiplier impact.

Morgan Stanley Research 5

M
Idea

Improvement in purchasing power with moderation in inflation and inflation

expectations remaining fairly steady: In our view, the inflation outlook from here should
be benign. We expect inflation to decelerate to 5.4% YoY in F2024 and 4.8% YoY in F2025
from 6.6% YoY in F2023, well within the RBI's flexible inflation targeting band of 2-6%,
driven by sequential easing in global commodity prices. This is further likely to aid in
anchoring inflationary expectations, which in turn translates into improved consumer
sentiment via higher purchasing power.

Further, in our view, we are at the end of monetary policy normalization. As such, financial
conditions are likely to remain steady from here on.

Exhibit 7: Service PMI in Expansionary Zone since August Exhibit 8: Naukri Job Index For IT and Non-IT Sectors
140%
2021 Naukri Jobspeak Index, YoY% 3MMA

Expansion 105%
Services PMI IT and IT related sectors
60
70% Non-IT Sectors
50

40 35%
Contraction

30 0%

20
-35%
10
-70%
Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Apr-22
Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
0
Jul-19

Jul-20

Jul-22
Jan-20

Jul-21

Jan-23
Jan-21

Jan-22

Source: Naukri Jobspeak Report, Morgan Stanley Research

Source: Haver Analytics, Morgan Stanley Research

Exhibit 9: Share of Employed by Sector Exhibit 10: Recent Layoffs across Companies
Sector-wise Share of Employed in Total Labour Force
Layoffs in India (no of ppl)
Industry , 26.1%
IT & ITES , 0.6% Byju's 1000
Hotel & tourism , 4.8%
Financial
services ,
Amazon 1000(1% of workforce)
1.7%
Education , Sharechat 500
3.0%
Public Wipro 400
Services, admin svs,
36.9% 1.8% Swiggy 380
Other
Services,
1.8%
Medibuddy 200
Wholesale &
retail trading ,
17.9%
Personal non- Ola 200
professional
Agriculture ,
services , 5.3% Dunzo ~3% of workforce
36.9%

Source: CMIE, Morgan Stanley Research Source: Newsflow, Morgan Stanley Research

6
M
Idea

Exhibit 11: Growth in Personal Loans Improves Exhibit 12: Trend in Passenger Vehicle and Two Wheeler Sales
Personal Loans, YoY% 12M Trailing, YoY%
21% 50.0%
TW Sales PV Sales
19% 40.0%
17% 30.0%
21.2%
15% 20.0%
13% 10.5%
10.0%
11%
0.0%
9%
-10.0%
7%
-20.0%
5%
Dec-17

Dec-22
Dec-15

Dec-16

Dec-18

Dec-19

Dec-20

Dec-21
Mar-16

Mar-17
Jun-17

Mar-18

Mar-19

Mar-20
Jun-20

Mar-21

Mar-22
Jun-16

Jun-18

Jun-19

Jun-21

Jun-22
Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
-30.0%

-40.0%

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Sep-12

Sep-14

Sep-16

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
May-13
Sep-13

May-15
Sep-15

May-17
Sep-17

May-19

May-20

May-21

May-22
May-12

May-14

May-16

May-18
Source: RBI, Morgan Stanley Research

Source: CEIC, Morgan Stanley Research

Exhibit 13: BSE 500 Employee Costs Rise Exhibit 14: BSE 500 Employee Costs, Net of Sales
41% BSE 500 Employee Cost Growth 14.0% BSE 500 Employee Cost
YoY% (% of net sales)
36%
YoY% 4Q MA
12.0%
31%

26%
10.0%
21%

16% 8.0%
Quaterly 4Q MA
11%

6% 6.0%
Mar-18

Mar-22
Dec-17

Mar-19

Mar-20

Mar-21
Jun-18

Dec-18

Jun-19

Dec-22
Dec-19

Jun-20

Dec-20

Jun-21

Dec-21

Jun-22
Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Dec-20

Dec-21

Dec-22
Dec-17

Jun-18

Dec-18

Jun-19

Dec-19

Jun-20

Jun-21

Jun-22
Mar-20

Mar-21

Mar-22
Mar-18

Sep-18

Mar-19

Sep-19

Sep-20

Sep-21

Sep-22

Source: Capitaline, Morgan Stanley Research Source: Capitaline, Morgan Stanley Research

Morgan Stanley Research 7

M
Idea

What will drive an improvement in rural demand?

High-frequency rural tracker

Our consolidated rural activity tracker continued to record improvement through October
2022 in YoY terms. However, it moderated in November 2022, owing to a weak trend in
two-wheeler and tractor sales (excessive volatility in the data). The resilient momentum
would have continued if we'd excluded these two indicators from the tracker.The tracker
improved a tad in December, led by strong momentum in other indicators, even as tractor
and two-wheeler sales continued to lag. See Exhibit 15

We believe that the worst of the rural activity is behind – we remain constructive on
the rural demand outlook: We expect rural demand to rebound gradually, helped by (a)
the fully reopened economy, (b) improving labour market conditions, and (c) improving
terms of trade for the rural sector. Further, robust trend in area under cultivation for
winter crops (up 2.9% YoY) and likely support from government spending in the rural
economy will help.

• Labour market conditions have normalised: Rural labour market conditions have
also staged recovery.
° The proportion of farmers in total employment is now normalizing and at
25.3%, stands a tad below the pre-pandemic figure of 26%.
° The rural unemployment rate is tracking at 6.5% in January 2023 (vs. 6.9% in
December 2019).
° Further, work demand under the national rural employment scheme is
moderating on a YoY basis.
• Terms of trade are gradually stabilizing: Non-food inflation is decelerating, led by
global commodity prices tracking 13-21% below their recent peaks. We expect the
terms of trade to improve as non-food inflation softens further.
• Government support remains: Central government capital spending is expected
to grow 37% YoY in F24, with a focus on infrastructure and construction, which
will have positive spillovers for employment through job creation. Further, the
government has stepped up procurement of rice, which is up 1.5% YoY, providing
support to farmers' income.

8
M
Idea

Exhibit 15: Aggregate Rural Economy Tracker Shows the Worst Exhibit 16: Government Support Remains Above Pre-Pandemic
Is Behind Levels
125 Central Govt Rural Spending, INR tn

10
115 Fertilizer Subsidy

8 Food Subsidy
105
Ministry of Rural Development
6
95 Ministry of Agriculture & Allied Activities
Second wave of
the pandemic 4
85
Rural Tracker, Indexed CY19 2
=100
75 First wave of
Rural Tracker(ex TW and Tractor 0
the pandemic
Sales)

F2023RE

F2024BE
F2010

F2011

F2012

F2013

F2014

F2015

F2016

F2017

F2018

F2019

F2020

F2021

F2022
65
Jun-19
Mar-19

Sep-19

Mar-20

Mar-21

Mar-22
Jun-20

Sep-20

Jun-21

Sep-21

Jun-22

Sep-22
Dec-19

Dec-20

Dec-21

Dec-22
Source: Budget Documents, Morgan Stanley Research. Note*: The central govt. spending figure is the
Source: CMIE, RBI, Company Data, CSO, CEIC, Haver Analytics, Morgan Stanley Research. Note: The sum of the expenditure by the Ministry of Agriculture and the Ministry of Rural Development and on the
tracker is derived by taking a weighted average of rural wages, ToT, service PMI, two-wheeler sales, Food and Fertiliser Subsidy
agriculture credit, agriculture exports, fertiliser sales, tractor sales, rural unemployment, rural ministry
spending. We index CY19 =100

Exhibit 17: Terms of Trade Showing Stabilization Exhibit 18: Labour Market Dynamics Normalizing
130 WPI Terms of Trade 450
Occupation-wise Share in Total Employed
Millions

(Food vs. Non Food) Business Salaried employees Small traders & wage labourers Farmers
125 400

120 350

115 300

110 250

105 200
Signs of deceleration
100 150

95 100

90 50
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22

0
Jul-19

Jul-20

Jul-21

Jul-22
Jan-19
Mar-19

Jan-20
Mar-20

Jan-21
Mar-21

Jan-22
Nov-19

Nov-20

Mar-22

Jan-23
Sep-19

Sep-20

Nov-21

Nov-22
May-19

May-20

May-21

Sep-21

Sep-22
May-22
Source: CEIC, Morgan Stanley Research
Source: CMIE, Morgan Stanley Research

Morgan Stanley Research 9

M
Idea

Are capex data turning? What will drive a durable capex

recovery?
We are seeing green shoots of capex recovery, with broad-based indicators such as
capacity utilization and industry credit growth picking up.

• Capacity utilization is tracking at 74.5 as of QE Sep-22, above its long-term average

trend of 72.
• Industry credit growth is tracking at 8.7% in Dec-22 from 1.6% in Dec-19.

We highlight the high-frequency trends related to capex data.

Private capex: Overall projects under implementation (as compiled by CMIE) for QE Dec-
22 showed an improvement in growth of overall investment projects, led by a pickup in
public projects despite a slowdown in private projects (driven partly by base effect).

Within new investments, while private investments accelerated further on a four-quarter

trailing basis, public investments decelerated.

Sector data across both ongoing and new investments show the highest growth for
manufacturing. Indeed, indigenous manufacturing is likely to get further impetus because
the government is considering extending the Production Linked Incentive (PLI) scheme for
sectors such as toys, furniture, etc., above and beyond the existing 14 sectors.

Public capex: On a 12-month trailing basis, the central government's capex has risen to
2.9% of GDP, in line with the 18-year high budgeted estimate of 2.9% of GDP for F2023. In
addition, the budget for F2024, pegs capex at INR10tn, which translates into 3.3% of GDP.
In our view, this is likely to further crowd in private investments. However, the trend in
state capex (12-month trailing) has moderated significantly.

Household capex: Real estate sales are tracking at 15.6% YoY in QE Dec-22 vs. -17.7% in
QE Dec-19, while new launches grew 41.7% in QE Dec-22, up from -30.6% in QE Dec-19.

Foreign investments: In terms of foreign investments, FDI flows have moderated, tracking
at 2.3% of GDP on a 12-month trailing basis as of Nov-22 vs. 2.6% in Nov-21, owing to
uncertainty in the global macro landscape. We expect these flows to gain momentum in
the coming months as economic conditions stabilize.

The drivers of capex will be:

• Improving end demand: As we highlighted above, high-frequency data remain

healthy and this is being reflected in capacity utilization rates tracking above the
long-term average. Further, with capex to GDP having steadily declined in the last
decade, we expect a pickup in capacity utilization to create the incentive for
businesses to invest. Indeed, CII's business confidence index rebounded to a two-
year high in QE Dec-22.

10
M
Idea

• Cleaner balance sheets for private corporate and financial sector: The corporate
sector balance sheets are in good shape. The corporate debt to GDP ratio is
projected at 47% in F2023 from a peak of 62% in F2015. The credit rating ratio of
upgrades to downgrades is tracking at a record high of 5.52x as of 1HF23. Impaired
loans have now decelerated to an 11-year low of 7.5% in F2022, indicating an
improving balance sheet position to fund the capex cycle. More importantly, Indian
banks have significantly increased provision coverage on their balance sheets over
the past two years.
• Supply-side reforms by the government: The combination of tax reduction for
companies and fiscal incentives under production-linked incentive schemes is
designed to improve the competitiveness of domestic manufacturing and attract
investments. To further improve competitiveness, the government is accelerating
spending on infrastructure investments, as discussed above.

Exhibit 19: Capacity Utilisation Tracking at 74.5 in QE Sep-22, Exhibit 20: Credit Growth Remains Healthy
above the Long-term Average of 72 35% Industry Credit Non-Food Credit

30% YoY%
84 Capacity utilisation
25%
80
Long term average: 72 20%
76
15%
72
10%
68
5%
64
0%
60 -5%
56 -10%
Jun-13

Jun-15
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12

Dec-13
Jun-14
Dec-14

Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
52
48
44 Source: RBI, Morgan Stanley Research
Dec-20
Sep-12

Sep-13

Sep-18

Sep-20

Sep-21

Sep-22
Mar-12

Mar-14
Sep-14

Sep-15
Mar-13

Mar-16
Sep-16

Sep-17

Sep-19
Mar-15

Mar-17

Mar-18

Mar-19

Mar-20

Mar-22

Source: Haver Analytics, Morgan Stanley Research

Exhibit 21: Diverging Trends in Centre and State Capex Exhibit 22: Capex Has Gained Momentum
12M Trailing, YoY% Centre Capex State Capex
Capex, INR bn
70%
18000 Central Govt State Govt* Listed co's^
50%
16000
30% 14000

10% 12000

10000
-10%
8000
-30%
6000
-50% 4000
Dec-15

Dec-20
Dec-16

Dec-17

Dec-18

Dec-19

Dec-21

Dec-22
Apr-16
Aug-16

Apr-17
Aug-17

Apr-18
Aug-18

Apr-19
Aug-19

Apr-20
Aug-20

Apr-21
Aug-21

Apr-22
Aug-22

2000

0
Source: CEIC, Morgan Stanley Research F2019 F2020 F2021 F2022 F2023#
Source: Capitaline, CEIC, , Morgan Stanley Research. Note: Data for F2023 is annualised from H1F23 data
for 4024 companies. State capex is based on data for 19 states

Morgan Stanley Research 11

M
Idea

Exhibit 23: Trend in Projects under Implementation Exhibit 24: Private Sector Leads Pickup in New Investments
20% Total Public Private
Projects under implementation - YoY% 25,000
Public Private Total New Investment Projects, Rs bn (4Q
15% 20,000 trailing sum)

10% 15,000

5% 10,000

0% 5,000

0
-5%

Dec-16

Dec-17

Jun-18

Dec-18
Jun-17

Jun-19

Dec-19

Jun-20

Dec-20

Dec-21
Jun-21

Jun-22

Dec-22
-10%
Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22
Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Source: CMIE, Morgan Stanley Research

Source: CMIE, Morgan Stanley Research

Exhibit 25: New Launches at Record Highs on Absolute Basis Exhibit 26: FDI Flows Tracking at 2.3% of GDP on a 12M trailing
basis
100 Gross FDI Inflows FDI flows on 12M trailing sum
12M trailing sum (US$ bn), LS
3.4%
basis are at 2.3% of GDP
90
12M trailing sum % of GDP, RS
80 3.0%
70
2.6%
60
50 2.2%
40
30 1.8%

20
1.4%
10
0 1.0%
Nov-11

Nov-12

Nov-13

Nov-14

Nov-17

Nov-18

Nov-19

Nov-20

Nov-21
Nov-15

Nov-16

Nov-22
Source: JLL, Morgan Stanley Research

Source: CEIC, Morgan Stanley Research

12
M
Idea

What is the impact of global conditions on growth?

The key channels of impact of global conditions are:

• Through slower export growth arising from weaker external demand; and
• Changes in global financial conditions with implications for currency.

At the margin, we see an improvement in both of these conditions:

• The reopening of the Chinese economy and a slightly better-than-expected outlook

for the Euro area are improving the global growth outlook at the margin
• The US dollar having peaked is helping to improve global financial conditions.

Global growth and export demand

India’s goods exports contracted 7.9% YoY in QE Dec-22 from +7.9% YoY in QE Sep-22,
driven by deepening repercussions of the global growth slowdown.

However, there are some offsetting factors, such as a robust trend in services exports and
some gains in export market share:

• The trend in services exports remains relatively better, with exports of services
growing 40.5% YoY as of QE Dec-22 vs. 30.7% in QE Dec-21.
• Further, we note that India's export market share has improved. Market share of
goods exports is about 10bps above pre-pandemic levels; for services it is 80bps
above pre-pandemic levels.

As we highlighted, global growth expectations are marginally better, helped by the

reopening of the Chinese economy and slightly better-than-expected data from the Euro
area.

China’s reopening and pro-growth economic and regulatory policy are leading to rapid
normalization in the growth trajectory, which augurs well for the rest of the world as well.
We expect the benefits to filter in through improved supply and distribution networks,
which have been compromised since the advent of the pandemic.

• China Macro & Strategy: Even More Bullish (9 Jan 2023).

In addition, building in lower energy prices – which in turn have positive implications for
inflation – and better-than-anticipated growth numbers for 4Q, our EU economists have
upgraded their growth forecast for the region to 0.5% YoY in 2023 from 0.2% YoY.

• Euro Area GDP: Mild Winter, Milder Downturn (20 Jan 2023)

Global financial conditions

In our view, the bulk of monetary policy tightening globally is behind – most central banks
are near their terminal rates. Our US economist pencils in two additional rate hikes of
25bps each in March and May, taking the terminal rate to 5-5.25%, in line with market
expectations.

Morgan Stanley Research 13

M
Idea

• US Economics: FOMC To Hike Through May (7 Feb 2023)

Per our strategy team's view, the US dollar peaked in October 2022 and should maintain
neutrality over the short term even as it is expected to depreciate in the medium term.
The strong US employment data for January are likely to lead to uncertainty about the
outperformance of growth in the rest of the world relative to the US, at least in the short
run. While the trend in inflation remains in line with expectations, our US economics team
is likely to remain watchful for any signs of volatility or reacceleration (as used vehicle
prices will likely stop their sharp decline).

• US Economics: CPI (14 Feb 2023)

• Consumer Price Index: January CPI: Your FAQs Answered (15 Feb 2023).

Later in the year, the DXY is likely to weaken as optimism in the rest of the world is
maintained, asset price reflation continues, and volatility and risk premia decline amid
global disinflation.

Exhibit 27: Trend in Goods and Services Exports, YoY% 3MMA Exhibit 28: India's Export Market Share for Goods and Services
YoY% 3MMA 2.0% India 4.8%
4.7%
60% 40% 1.9% World goods export share 4.6%
Goods Exports Services Exports 30.2%
35% World services export share (RS)
1.9% 4.4%
40% 30%
1.8% 1.8% 4.2%
25%
1.8% 4.0%
20% 20%
15% 1.7% 3.8%
0% 10% 1.7% 3.6%
5% 1.6% 3.4%
-7.9%
-20% 0%
1.6% 3.2%
-5%
1.5% 3.0%
-40% -10%
Sep-11

Sep-14

Sep-15

Sep-18

Sep-19

Sep-22
Sep-12

Sep-13

Sep-16

Sep-17

Sep-20

Sep-21
Aug-13

Aug-20
Aug-12

Aug-15

Aug-18

Aug-21
Dec-12
Apr-13

Dec-13
Apr-14
Aug-14
Dec-14
Apr-15

Dec-15
Apr-16
Aug-16
Dec-16
Apr-17
Aug-17
Dec-17
Apr-18

Dec-18
Apr-19
Aug-19
Dec-19
Apr-20

Dec-20
Apr-21

Dec-21
Apr-22
Aug-22
Dec-22

Source: CEIC,Haver Analytics, Morgan Stanley Research Source: Haver Analytics, Morgan Stanley Research

Exhibit 29: Oil Prices to Contract, Basis Oil Futures Curve Exhibit 30: Commodity Prices Off Peaks
90% Brent, YoY%

70%
As per oil futures
curve
50%

30%

10%

-10%

-30%
Jan-22

Jun-22

Jan-23

Jun-23
Mar-22

Jul-22

Mar-23

Jul-23
Feb-22

Nov-22
Dec-22

Feb-23

Nov-23
Dec-23
Aug-22
Sep-22
Apr-22
May-22

Oct-22

Aug-23
Sep-23
Apr-23

Oct-23
May-23

Source: Bloomberg, Morgan Stanley Research

Source: Bloomberg, Morgan Stanley Research

14
M
Idea

Exhibit 31: Markets Have Repriced Fed Peak Rate Higher Exhibit 32: DXY vs. USD/INR
122
DXY US$/INR DXY has
119 depreciated by
9.1% from its peak
116 Indexed to Jan-22=100

113
Dollar Strength,
110 Rupee Weakness

107

104

101

98

95

19-Jan-22
3-Feb-22

4-May-22

18-Jun-22

17-Aug-22

16-Sep-22

14-Jan-23
29-Jan-23
4-Jan-22

18-Feb-22

3-Jun-22

16-Oct-22
31-Oct-22
15-Nov-22

13-Feb-23
18-Jul-22

30-Nov-22
15-Dec-22
30-Dec-22
2-Aug-22

1-Sep-22
20-Mar-22
5-Mar-22

19-Apr-22

19-May-22
4-Apr-22

3-Jul-22

1-Oct-22
Source: Bloomberg, Morgan Stanley Research
Source: Bloomberg, Morgan Stanley Research

Morgan Stanley Research 15

M
Idea

What are the risks to our view?

Key risks to our outlook stem more from external factors rather than domestic or
structural factors: In our view, the key cyclical challenge is likely to be a greater than
anticipated global slowdown owing to a weaker trend in growth in key DMs amid
recession-like conditions and tighter global financial conditions.

We expect growth for the domestic economy to hold up, but a greater-than-anticipated
spillover impact from weak global conditions – as reflected in slow external demand and
subdued business sentiment – may have more pronounced implications for domestic
growth in the near term.

This would be likely to influence the pace and timing of capex recovery – especially of
private capex, which will have implications for jobs growth – and thus delay a broad-based
cyclical recovery in growth.

Further, an increase in commodity prices (particularly of oil) driven by the supply side and/
or volatility in global capital flows could have implications for India's macro stability and
thus affect domestic policy.

In addition, we will also remain watchful of any deterioration in domestic macro stability
indicators such as upside to CPI or wider current account deficit. That could warrant
tighter than anticipated monetary policy, constraining the growth outlook.

16
M
Idea

Disclosure Section
Information and opinions in Morgan Stanley Research were prepared or are disseminated by one or more of the following, which accept responsibility for its contents: Morgan Stanley Asia
Limited, and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H),
regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with,
Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734
576, holder of Australian financial services license No. 233742), and/or Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services
license No. 240813, and/or Morgan Stanley India Company Private Limited, regulated by the Securities and Exchange Board of India (“SEBI”) and holder of licenses as a Research Analyst (SEBI
Registration No. INH000001105), Stock Broker (BSE Registration No. INB011054237 and NSE Registration No. INB/INF231054231), Merchant Banker (SEBI Registration No. INM000011203),
and depository participant with National Securities Depository Limited (SEBI Registration No. IN-DP-NSDL-372-2014) which accepts the responsibility for its contents and should be contacted
with respect to any matters arising from, or in connection with, Morgan Stanley Research and their affiliates (collectively, "Morgan Stanley").
For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website
at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY,
10036 USA.
For valuation methodology and risks associated with any recommendation, rating or price target referenced in this research report, please contact the Client Support Team as follows: US/Canada
+1 800 303-2495; Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81
(0)3-6836-9000. Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Global Research Conflict Management Policy

Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. A
Portuguese version of the policy can be found at www.morganstanley.com.br

Important Disclosures
Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those
who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser.
The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research
may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the
solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes
in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There
may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future
performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject
company's securities/instruments.
The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors,
including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive
factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the
profitability or revenues of particular trading desks.
With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive
information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from
when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information
known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
Morgan Stanley may make investment decisions that are inconsistent with the recommendations or views in this report.
To our readers based in Taiwan or trading in Taiwan securities/instruments: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL").
Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research
may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Any non-customer reader within the scope of Article
7-1 of the Taiwan Stock Exchange Recommendation Regulations accessing and/or receiving Morgan Stanley Research is not permitted to provide Morgan Stanley Research to any third party
(including but not limited to related parties, affiliated companies and any other third parties) or engage in any activities regarding Morgan Stanley Research which may create or give the
appearance of creating a conflict of interest. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation
or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments.
Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or
the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant
approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Neither this report nor any part of it is intended as, or shall constitute, provision
of any consultancy or advisory service of securities investment as defined under PRC law. Such information is provided for your reference only.
Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A. located at Av. Brigadeiro Faria Lima, 3600, 6th floor, São Paulo - SP, Brazil; and is regulated by the Comissão
de Valores Mobiliários; in Mexico by Morgan Stanley México, Casa de Bolsa, S.A. de C.V which is regulated by Comision Nacional Bancaria y de Valores. Paseo de los Tamarindos 90, Torre 1,
Col. Bosques de las Lomas Floor 29, 05120 Mexico City; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group
Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents) and by Morgan Stanley Bank Asia Limited; in Singapore by Morgan Stanley Asia
(Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of
Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research) and by Morgan
Stanley Bank Asia Limited, Singapore Branch (Registration number T14FC0118J); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley
Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail

Morgan Stanley Research 17

M
Idea

clients" within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license
No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Vietnam
this report is issued by Morgan Stanley Singapore Holdings; in Canada by Morgan Stanley Canada Limited; in Germany and the European Economic Area where required by Morgan Stanley
Europe S.E., regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin) under the reference number 149169; in the United States by Morgan Stanley & Co. LLC, which accepts
responsibility for its contents. Morgan Stanley & Co. International plc, authorized by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential
Regulatory Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which
has been prepared by any of its affiliates. RMB Morgan Stanley Proprietary Limited is a member of the JSE Limited and A2X (Pty) Ltd. RMB Morgan Stanley Proprietary Limited is a joint venture
owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley
Research is being disseminated by Morgan Stanley Saudi Arabia, regulated by the Capital Market Authority in the Kingdom of Saudi Arabia, and is directed at Sophisticated investors only.
The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating
to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was
developed by and is the exclusive property of MSCI and S&P.
Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.
Indicators and trackers referenced in Morgan Stanley Research may not be used as, or treated as, a benchmark under Regulation EU 2016/1011, or any other similar framework.
The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA),
and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who
we are satisfied meets the regulatory criteria to be a Professional Client. A distribution of the different MS Research ratings or recommendations, in percentage terms for Investments in each
sector covered, is available upon request from your sales representative.
The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority
(the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.
As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment
advisory service is provided exclusively to persons based on their risk and income preferences by the authorized firms. Comments and recommendations stated here are general in nature. These
opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about
outcomes that fit your expectations.

© 2023 Morgan Stanley

18