An electronic payment terminal sits on a metal drum at an Indraprastha Gas Ltd. gas station in New Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

Morgan Stanley Bets On Digital To Forecast $6 Trillion Economy, Sensex At 1,30,000

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On the two pillars of JAM and GST, the top team at Morgan Stanley Research has built a tower of forecasts for the Indian economy.

The most important ones being...

  • By 2027, India will be the world’s third-largest economy with a gross domestic product of $6 trillion.
  • A rapid rise in consumer credit and credit to micro-, small- and medium-sized enterprises.
  • Strong household consumption and a declining share of food in the consumption basket.
  • A $200 billion e-commerce market—12 percent of India’s retail sector.

While the premise is a familiar one, the report, titled ‘India’s Digital Leap – The Multi Trillion Dollar Opportunity’, attempts to connect the dots differently.

It argues that the Indian government’s effort to ensure that almost every household has a bank account via the Jan-Dhan Yojana combined with the Aadhaar unique identification programme and mobile connectivity, and Goods and Services Tax-led digitisation will yield big data, big revenue, big growth and big gains in the equity markets.

1. Big Data Opportunity

The combination of digital payments and GST will create “high-quality, high-frequency” data that will give MSMEs easier and cheaper access to credit, says the report. It also expects a big shift in credit culture and a rapid increase in consumer loans.

  • Expect MSME lending to have a 17 percent compounded annual growth rate over the next decade.
  • Expect consumer loan growth at 17 percent compounded annual growth rate over the next decade.
Lenders will get access to cash flow data of MSMEs (micro, small and medium enterprises) through multiple sources - for instance, digital payment platforms but more importantly GSTN (the Goods and Services Tax Network). This will likely help them get access to high-quality, high-frequency data that will allow them to lend to this sector.  
Morgan Stanley Research Report

MSME Lending
The report makes the point that lending to this sector has so far been collateral based, often as loans against property. But improved data could help the transition to cash flow-based lending.

It also expects lending rates to decline by 300-400 basis points over the next five years as real-time data flow reduces loan risk.

The third trend listed for this space is some dilution in the dominance that non-banking finance companies have when lending to this sector. Fintech companies are already making inroads with new products such as supply-chain finance. Banks will also start using data models to improve their share of lending to MSMEs.

Consumer Lending
Similar trends have been forecast for consumer lending, predicated on the government’s push for affordable housing, households using more leverage to buy discretionary items and big data allowing for better assessment of risk by lenders.

We expect consumer lending to grow at a CAGR of ~17 percent over this period and to increase to around 25 percent of GDP. This would imply retail loans will increase by around 5x to $1.5trillion.
Morgan Stanley Research Report

2. Big Ecommerce Opportunity

Morgan Stanley expects the rise in digital payments and GST to be significant “enablers for the growth of the online economy”.

  • Internet penetration expected to grow from 33 percent and 432 million internet users to over 60 percent and 915 million users in 10 years.
  • At 60 million, online shoppers constitute 14 percent of the total internet population. By 2027, this is expected to rise to 475 million shoppers amounting to over 50 percent of of all internet users.
We expect ecommerce sales to grow at a 30 percent CAGR through FY2027 (C2026) and to touch ~ $200 billion of GMV, translating into a 12 percent online penetration within retail sales, versus ~2 percent in FY2017 (C2016).
Morgan Stanley Research Report

3. Growth Booster

Digitisation will boost GDP growth by 50-75 basis points and GDP growth will average 7.1 percent till 2027, says the Morgan Stanley report. The key areas of improvement will be...

  • Better tax compliance.
  • Improvement in public finances.
  • Welfare spending efficiency.

The report points to India’s investment-to-GDP ratio averaging 27.9 percent compared to 30-35 percent for most Asian economies.

Over the next decade, we expect investment-to-GDP ratios to average 34.3 percent, contributing 3 percentage points to real GDP growth.
Morgan Stanley Research Report

It also forecasts a shift in household consumption, with expenditure moving to non-food items.

And it expects that higher tax revenues on account of GST will lower the fiscal deficit and public debt-to-GDP ratio.

All of which will amount to a $6 trillion economy by 2027.
On a per capita income basis, the changes would be even more profound. We estimate that per capita annual incomes will likely reach $4,135 by FY2027, lifting India into an upper-middle income status. To put this in perspective, per capita incomes in India by 2027 would be similar to those of China in 2010.
Morgan Stanley Research Report

4. Sensex At 1,30,000

The 123-page report, including disclaimers and risk factors, culminates in even bigger forecasts.

  • Expect 10.1 percent CAGR in earnings (U.S. dollar terms)
  • Project equity saving of between $420 billion and $525 billion over the next 10 years.
  • The financial-savings-to-GDP ratio would rise to 13.5 percent, higher than the long-term average of 11 percent.
  • Leading indices could compound at around 25 percent in the coming five years.
Bull case for S&P BSE Sensex is 1,30,000 in 2027
Trading likely to rise from $21 trillion to $41 trillion in 2027

Morgan Stanley recommends buying shares of financial and discretionary consumption companies.

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