Manufacturing is the answer for India’s key concerns – attracting foreign investment, sustaining economic growth and tackling medium-term funding challenges. This is as per the latest report by Chetan Ahya, Chief Asia Economist of Morgan Stanley.
The global brokerage firm noted that recent measures taken by the government and the Reserve Bank of India (RBI) could help attract foreign capital in the near-term. However, the brokerage believes India will need broader structural measures to address its medium-term challenges. Here’s how manufacturing can provide a “double boost” to the economy by narrowing the current account deficit and attracting foreign capital.
Manufacturing can improve balance of payments
India is facing multiple economic challenges, many of which have been exacerbated by the ongoing conflict in the Middle East. The country’s balance of payments (BoP) has come under pressure due to a combination of capital outflows, higher oil prices and weaker exports. Net foreign investor flows have remained subdued, while foreign direct investment (FDI) has been impacted by repatriation and outward investments. At the same time, the trade deficit has widened as rising energy import costs and weaker exports to the Middle East have weighed on the external account.
“Boosting manufacturing and goods exports is the medium-term solution to India’s balance of payments problem, in our view. Manufacturing can address the current account and capital account in one move – by narrowing the current account and attracting capital flows,” Morgan Stanley noted.
India’s funding challenge
India is facing a structural funding challenge as its investment needs continue to rise. Morgan Stanley noted that to tackle this India needs to increase domestic savings sustainably over the medium term and to increase savings it needs higher employment.
“Boosting manufacturing exports is the key to solving the jobs challenge,” Morgan Stanley noted. Every job created in manufacturing exports can generate two additional jobs in related sectors such as logistics, transport, design, marketing and research and development.
Why Morgan Stanley bets on mnufacturing and not services?
Morgan Stanley also that artificial intelligence could create challenges for India’s traditional services-led export model.
India’s IT and Global Capability Centre (GCC) ecosystem currently generates services exports worth $321 billion, or 7.9% of GDP. However, the brokerage expects AI-led disruption to slow the pace of growth in IT services exports over the coming years.
The report said India has successfully increased its share of global services exports over the past decade, but its share of global goods exports has remained largely unchanged at around 1.7%.
This, it said, increases the urgency of strengthening manufacturing competitiveness.
Conclusion
Morgan Stanley said India is entering a period in which manufacturing will become increasingly important for sustaining growth, creating jobs and attracting investment.
The brokerage firm said that the country should adopt a systematic approach to industrial development by targeting high-growth sectors, strengthening domestic supply chains, improving access to finance, increasing research and development spending and expanding workforce skills.