Morgan Stanley India Economist Upasana Chachra spoke to FE about the state of the Indian economy following the US-Iran peace deal and amid rising concerns about a monsoon deficit. Excerpts:
Q: What is your short- to medium-term outlook on economic growth, inflation, and the balance of payments?
The economy has held up better than anticipated despite the West Asia conflict. High-frequency indicators are strong: credit growth at 16-17% in April-May, double-digit growth in passenger and commercial vehicle sales, and high power demand. PMI readings recovered in April and May after a March dip. We expect GDP growth at 6.7% in FY27, with the June quarter moderating to around 6.5% before normalising near 7% by January-March 2027. Inflation remains benign: Annual CPI growth in May was 3.9%, and core inflation was 2.3%. However, El Niño and a weak monsoon could push the headline figure above 5.5-5.7% in the second half of the current fiscal year. For FY27, we project inflation at 5%, close to the RBI’s forecast of 5.1%. On the external front, assuming oil averages $91 per barrel, the current account deficit could be 1.8% of GDP, but capital inflows of $40-60 billion could keep the balance of payments broadly neutral.
Q: On the inconsistency between some easily measurable data and derived macro numbers like GDP growth.
India’s share in global goods exports has stayed around 1.7% for many years. Structural reforms in factor markets, especially land and labour, are needed. The push to sign FTAs with developed economies is a positive step, but India must also improve ease of doing business and manufacturing competitiveness. While PLI schemes and infrastructure expansion are important, they alone cannot deliver sustained gains. Greater deregulation, land reforms and labour market reforms, particularly at the state level, are equally critical to strengthen exports and manufacturing.
Q: Manufacturing share in GDP remained around 17-18% for many years. Labour-intensive or new-age production: Where should the policy focus be?
India cannot afford to choose between labour-intensive and advanced manufacturing. Both are essential. Labour-intensive sectors such as textiles, food processing, and gems and jewellery are crucial for absorbing workers, particularly as India’s working-age population continues to expand over the next decade. At the same time, advanced manufacturing sectors such as semiconductors, green hydrogen and electronics are becoming increasingly important due to global supply-chain realignments. Policymakers should therefore pursue a dual strategy that supports both traditional and high-tech manufacturing while seeking to regain market share in sectors like textiles where India has lost ground.
Q: Exports from labour-intensive sectors fare worse than overall merchandise shipments.
That underlines the need to refocus on labour-intensive industries. However, this should not come at the expense of advanced manufacturing. The geopolitical environment has made supply-chain resilience a priority for many countries. Governments worldwide are promoting onshoring of critical industries through industrial policies. India’s semiconductor mission and initiatives in critical minerals and rare earths reflect this trend. The economy needs both labour-intensive and advanced manufacturing sectors to grow simultaneously if it is to generate jobs and sustain higher growth.
Q: How do we reconcile “China +1” and dependence on China?
The informal sector remains a major source of employment and continues to be particularly important in services such as tourism, health and education. However, over time, the share of formal employment should rise as the economy develops. Manufacturing is critical in this transition because export-oriented manufacturing has high employment elasticity and can generate both direct and indirect jobs. While dependence on Chinese imports remains significant, India should continue diversifying supply chains and improving competitiveness rather than relying solely on protectionism.
Q: Do you think we should be more liberal about attracting FDI from China?
Policymakers have already eased some restrictions under Press Note 3. Given the large and growing trade deficit with China, there is merit in exploring ways to deepen economic engagement with that country, including investment and technology partnerships, but through a measured and strategic approach.
Since India already imports heavily from China, calibrated Chinese investment could help localise parts of the manufacturing value chain. However, any policy shift is likely to remain gradual and carefully managed.
Q: A gradual process of formalisation, not sudden destruction of the informal sector, is what we need..
The transition from informal to formal employment must be gradual. Policies should not disrupt the informal sector. Instead, formalisation should occur organically as the economy grows. Informal businesses often support formal-sector activity and remain an integral part of the broader economic ecosystem.
Formal industries often generate significant indirect employment in the informal economy. As growth becomes more broad-based, the composition of employment will evolve naturally, but the informal sector will continue to play an important role.
Q: Is it not a demand problem? If the industry is confident about the demand, then why are they so cautious about investing?
Private-sector investment remains constrained because demand conditions are not yet strong enough to trigger a broad-based capex cycle. RBI surveys show capacity utilisation hovering around 74-76%, whereas levels closer to 80% are typically needed to encourage large-scale investments. Some sectors are investing, including real estate, construction materials, electronics manufacturing services, semiconductors and energy. However, investment momentum is still sector-specific rather than economy-wide.
Energy security should indeed have been a priority. Now, repeated geopolitical disruptions have accelerated the focus on energy transition and energy security, making them a key investment theme.
The main reason (for low investments) remains macroeconomic. Capacity utilisation has not reached levels that would justify a large-scale investment cycle. The economy also had to recover from the Covid shock, while external demand remained uneven. These factors have limited the confidence needed for a broad-based private capex boom.
Q: The government has been trying to increase its capex. But this strategy has not helped to the desired extent…
Government capex has supported investment in some sectors, but demand conditions remain less buoyant than required. Moreover, China’s substantial excess manufacturing capacity, particularly in EVs, energy equipment and industrial goods, has discouraged fresh capacity creation elsewhere. Global demand growth has also remained moderate, limiting incentives for large new investments.
Weak global demand combined with China’s excess capacity has reduced the appetite for fresh investments worldwide. This is one reason why the China Plus One strategy has gained traction, allowing other countries to capture some relocated manufacturing capacity.
Q: How do you assess the Union government’s fiscal matrix?
Earlier, there were concerns that higher subsidies on fertilisers, LPG and fuel-related tax cuts could lead to fiscal slippage of around 30 basis points of GDP. However, the sharp fall in crude oil and fertiliser prices has improved the outlook. Urea prices have declined by about 40% in the past month, reducing subsidy pressures. The government may allow some fiscal slippage while protecting capital expenditure.
Q: Tax revenue estimates in the FY27 Budget were conservative wth buoyancy estimate of 0.8, yet there’re concerns on this front…
Since recent budgets have not relied on overly ambitious tax targets, there is some buffer available. Early focus on disinvestment should improve the chances of meeting revenue targets compared with recent years. A tax buoyancy assumption of 0.8 is not particularly aggressive and provides a realistic starting point for revenue projections.
TOPICSMorgan StanleyTop VoicesThis article was first uploaded on June twenty-five, twenty twenty-six, at forty-seven minutes past one in the night. © The Indian Express (P) Ltd