Business Standard Special: Morgan Stanley Report

Friday, October 6th, 2017

I wrote an article today for the Business Standard paper and it has been highlighted as the focus piece of the day. Reposting it here on this blog:


The stock market is a fickle animal. Three months ago, sentiments could not have been more bullish after a strong rally. But, the tide has turned since, with pessimism on the macro front bringing down stock prices. When there is so much negativity surrounding the future growth prospects of the economy, I always find it useful to look at the contrarian view. And there is no report that is more bullish than the Morgan Stanley research piece on India’s digital leap.

The piece talks about how the one-two punch of goods and services tax (GST) and the JAM Trinity (Jan Dhan, Aadhaar and mobile number) will cause a step change in the digitisation of the Indian economy and would create a “multi-trillion-dollar opportunity”. That’s a big number. So, it’s definitely worth looking at the implications of this transformation.


There are four big ones that have been identified — greater confidence in future growth, financial sector revolution, strong household consumption and an e-commerce boom. Let’s look at each of these in more detail.


Greater confidence in future growth is attributed to favourable demographics, increasing globalisation and continuing reforms. The latter two factors are an ongoing process in India and it’s reasonable to expect them to continue their contribution to growth.


On the demographics front, the report expects that 122 million people would enter the workforce over a 10-year period given the much-talked-about demographic dividend. Can we really expect this to happen? The last few years have seen poor job growth and in fact, sectors like banking, which will be most transformed by digitisation, are cutting jobs. This is not to mention that the combination of GST and demonetisation will force a large number of small businesses to shut shop because they can no longer operate under the tax and regulatory arbitrage of the informal economy. If we could not create 10 million jobs per year in the last few years, how will we create 122 million in the next 10 years with these additional challenges?


The second factor in the report is a financial sector revolution. Digitisation and formalisation will lead to a huge surge in data available to the financial sector. Increased data will reduce the cost of providing financial services. In addition, regulations will now force banks to lend to segments other than corporates. This seems reasonable and both the government and the Reserve Bank of India (RBI) have been working towards increasing competition in the financial sector and also improving financial inclusion.


Third, a household consumption boom. As per capita incomes rise, the share of expenditure is likely to shift towards non-food consumption. This matches trends in other emerging markets and by plotting how economies grow over time. The catch is that it is predicated on consumer credit growing at 17 per cent annually. Will the average consumer be able to afford this EMI lifestyle?


Finally, an e-commerce boom. India had about 60 million online shoppers in 2016. The report expects 475 million online shoppers in FY27 and online spending per capita at 10 per cent of gross domestic product (GDP). This seems unrealistic. It is a straight-line mapping to the Chinese economy, which works in a very different way from ours. The base case for Morgan Stanley’s per capita GDP projection is $4,135. This means that in 10 years, they expect Indians to spend approximately twenty-seven thousand rupees on average every year on e-commerce! How many phones and electronics can you buy? Even if this was possible, today’s e-commerce markets are characterised by heavy discounting, directed at taking market share away from existing players. This speaks to me of an industry in consolidation, rather than one, where there is greenfield expansion with lots of headroom for growth.


Let’s assume, however, that all of this comes true; that we get greater growth, an e-commerce boom, a financial sector revolution and a household consumption boom. What are the investment implications according to the report? The first implication is that stronger growth will lead to a stronger equity market performance.


In my opinion, the growth of the economy and growth of the market are not linked. Just look at the case of India after demonetisation where growth was slowing, but the stock market was booming. The second implication is that financials and the consumer sector will grow from 47 per cent of today’s market to 63 per cent of the market in 2027. While this could be possible, it does seem like a bit of a stretch, especially in light of high valuations in each of these sectors currently.


This report then seems like a moonshot. At first glance, it is hard not to get swept away with all the possibilities our economy could achieve, and I could not help but feel more excited about the future of India. However, on closer observation, there seem to be many holes in the arguments and assumptions that the authors make. It is only if everything goes exactly right and follows the most optimistic path, then the report’s conclusions are possible. I have come away with more questions and doubts and wonder after reading the report.

About the author

Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.

View all author posts →

Discuss this post:

Your email address will not be published. Required fields are marked *