Morgan Stanley’s report on India is an exercise in cherry-picking

The report makes no mention of India's K-shaped economic recovery after the pandemic in which the sale of entry-level cars has crashed while demand for SUVs has shot up (Photo: Bloomberg)
The report makes no mention of India's K-shaped economic recovery after the pandemic in which the sale of entry-level cars has crashed while demand for SUVs has shot up (Photo: Bloomberg)


It shows only one side of the story and seems aimed at building a narrative to drive up stock prices

A fundamental skill needed to be an investment manager or stockbroker is the ability to talk up future prospects of the economy one operates in. Common sense suggests that fund managers should talk up the prospects of specific stocks, but that doesn’t happen often because many fund managers aren’t allowed to do that. Also, if the idea is to attract investments from foreigners — who are more interested in making a country-level allocation than investing in specific stocks — it makes more sense to talk up economic prospects.

So, it’s hardly surprising that many reports on India have been published over the years in which the future prospects of the economy are talked up to make a case for investing in stocks. This formula has been followed for two decades now.

One such report, published recently by Morgan Stanley Research (MSR), states that India has transformed in less than a decade. It builds its case by highlighting 10 big changes in the Indian economy, while cherry-picking data and leaving out nuance.

Take the gross foreign direct investment (FDI) coming into India, which the report shows as an upward sloping curve. The gross figure doesn’t take into account the repatriation/disinvestment that happens every year. It also doesn’t take into account the increasing size of India’s economy. Once we do that, the figure for 2022-23 stands at 1.2% of GDP, having peaked at 3.5% in 2008-09. In the past 10 years, it has ranged from 1.2% to 2.1%.

A case is made for how India’s corporate income tax rate is now in line with that of its peers. In fact, corporate income tax collections peaked at 3.9% of GDP in 2007-08 and fell to 3.5% in 2018-19, the year before the pandemic struck. The ratio was at 3% in 2021-22 and 3.1% in 2022-23.


The post-2019 fall in corporate tax collections has been due to the cut in the corporate income tax rate in September 2019. Here’s the thing: the corporates have earned windfall profits post-2019 because of lower interest rates and increasing economic formalisation.

Indeed, the sample of more than 30,000 companies, both listed and unlisted, tracked by the Centre for Monitoring Indian Economy suggests that from 2018-19 to 2021-22, total sales went up 21%. Profit after tax — thanks to lower tax rates and lower interest rates — rose by a whopping 237%. In comparison, tax provisions of these companies increased just 37%. Clearly, the corporate tax-rate cut has come at a great cost, with individuals having to make up for it by paying more tax.

Another point made in the report is that inflation has been lower post-2014. That’s true. Nonetheless, in 2011-12, 2012-13 and 2013-14, the average price of the Indian basket of crude oil was more than $100 per barrel, which hasn’t happened since. A mention of this was necessary.

Then there is that favourite of fund managers – the huge amount of money coming into mutual funds (MFs) through systematic investment plans (SIP). In the past few years this has been an upward sloping curve, with the amount of money being invested into MFs through SIPs rising every year. The MSR report cites this upward sloping curve as another example of something that has changed in the past few years.

In 2016-17, investments through SIPs averaged 3,660 crore a month. By 2022-23, they had jumped to 13,000 crore a month. MSR calls this India’s ‘401(K) moment’ to make the data more palatable to a US audience.

The trouble is that nuance has gone missing again here. Investors make money through SIPs only if they hold on to their investments for a while. Nonetheless, as a recent consultation paper published by the Securities and Exchange Board of India (Sebi) pointed out, only 3.1% of the MF units that investors redeemed in 2022-23 had been held for more than five years. In 2021-22 this was 2.6%. More than half of MF units are redeemed within a year of investment.

This clearly tells us that while investors are investing through SIPs, they are not holding on to their investments for long enough, meaning that equity investing will eventually turn out to be disappointing for them. The MSR report doesn’t get into these details.

Of course, like every other report these days, MSR’s points out how Indians have taken to digital payments like fish to water. While this suggests convenience for consumers and better data for the government and financial firms, it in no way suggests an increased ability to consume things. Most of these transactions are of low value and were already happening in cash.

There is also no mention of the K-shaped economic recovery after the pandemic. Two-wheeler sales in 2022-23 were similar to those in 2014-15. While the sale of entry-level cars has crashed, there are waiting periods for SUVs. Airline travel in 2022-23 almost recovered to pre-pandemic levels, but non-suburban rail travel was 29% lower than in 2018–19.

Sluggish rural consumption finds no mention either.The volumes of FMCG companies – the number of units of various products sold by these companies – has not been looking good for a while. As Ritesh Tewari, chief financial officer of Hindustan Unilever, said in a 27 Aprilearnings call: “We need to be mindful that FMCG market volumes have been declining for almost a year and a half. Rural market volume is still declining."

Then there is the case of work demanded under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), India’s work guarantee scheme. Last month 31.74 million households demanded work under it – more than has ever been demanded in the month of May, except in 2020, just after the pandemic broke out.

In fact, the work demanded by households during April-May has been the highest ever for the first two months of a financial year – even higher than in April-May 2020. This is yet another indicator of the K-shaped economic recovery that India is currently experiencing.

Further, direct-benefit transfers to the population have gone up over the years. This spending stood at 3.82 trillion or 1.9% of GDP in 2019–20. It has since jumped to 6.67 trillion or 2.45% of GDP in 2022–23. This increase again indicates that the financial situation of many Indians is precarious.

Interestingly, the report has a chart showing the money invested by foreign portfolio investors (FPIs) in Indian stocks and debt. FPIs brought in the most money into India in the years before 2017-18 (Take a look at the accompanying chart). Of course 2020-21, when Western central banks cut interest rates to almost zero, was an exception.

Finally, in 2015-16, India’s agriculture sector was around 4% bigger than manufacturing (in nominal terms). In 2022-23, agriculture was 25% bigger than manufacturing. This despite increasing tariff protection and programmes like production-linked incentives to encourage companies to make in India. The MSR report gives this a complete miss. The history of economic development tells us that no country has gone from developing to developed without moving people away from agriculture into manufacturing.

As economist Ha-Joon Chang writes inBad Samaritans —The Guilty Secrets of Rich Nations & the Threat to Global Prosperity:“History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services."

In India, the opposite seems to be happening. The government’sPeriodic Labour Force Survey also bears this out. The latest annual data is available for the period July 2021 to June 2022. The proportion of the workforce in agriculture has gone up from 42.5% in 2018-19 to 45.5% in 2021-22.

All this leads us to the bigger point: How can any serious report on the Indian economy ignore all this important data? This can only be done when the idea is to cherry-pick to build a narrative and leave out any nuance.

This is not to say that everything is doomed. Not at all. The investment scene seems to be turning around. Bad loans of banks and corporate debt have both come down. Goods and services tax collections have improved thanks to better implementation (and high inflation). Services exports are also looking up.

Indeed, as has happened in the past, the stock market may do well irrespective of how the economy performs. The economy’s rising formalisation might be one reason for this. Second, if central banks in the West go back to a low interest rate policy, money might come pouring in and drive up stock prices like in 2020 and 2021.

Vivek Kaul is the author of ‘Bad Money’.

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