India cannot match China's past growth of 8-10%, says Morgan Stanley

India is unlikely to achieve the 8 to 10 percent economic growth rates achieved by China in the long term, Morgan Stanley's chief Asia economist said, although the investment bank remains optimistic about the South Asian country's prospects.

India's economy is likely to grow steadily at 6.5-7% in the long run, Chetan Ahya said in an interview with Bloomberg Television's Haslinda Amin on Monday. The South Asian country is also far from replacing its larger rival as a global manufacturing hub, he added.

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According to official figures, China's growth averaged 10% a year in the three decades following its economic reforms in 1978.

Economic progress in India is hampered by a lack of infrastructure and a low-skilled workforce, Ahya said. “These two constraints make us believe that India's growth will be strong, but at 6.5% to 7% and not 8% to 10%,” he said.

Still, Morgan Stanley remains optimistic about India's prospects, saying in a recent report that the current expansion resembles that of the mid-2000s boom, driven by rising investment.
Investment is fueling India's rapid growth

India “will take its rightful place” and early signs of economic recovery are visible in the increase in capital flows and the increase in India's share of global foreign direct investment, he said. “But to say that India will replace China or compete very strongly with China in manufacturing, we think is less likely,” he said.

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“China is much more advanced in manufacturing and entering new industries such as renewable energy, space and legacy semiconductors,” Ahya said. “It will take time for India to achieve this kind of competitiveness,” he said.

India recorded a growth rate of 8.4% in the last three months of 2023, although economists have raised doubts about the strength of the data. Government officials said the economy is expected to grow 7% in the fiscal year starting in April, following expectations of 7.6% growth this fiscal year.

Ahya said strong growth could influence the timing of the Reserve Bank of India's rate cuts this year. While Morgan Stanley's base case still sees a “flat rate cutting cycle” from June onwards, growth surprises could lead to the “possibility that the RBI either delays the rate cut or is unlikely to move forward with it at all.”

RBI Governor Shaktikanta Das has said he is not ready to cut interest rates unless inflation sustainably settles around the 4 percent target. Latest data for February showed inflation was still more than 1 percentage point above target.

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