India doing well on a relative basis, but can't escape growth slowdown due to tariff tantrum: Chetan Ahya

Economic Times

02-05-2025

Chetan Ahya, Chief Asia Economist, Morgan Stanley, says India's economic growth is projected to slow down to 5.7% in Q4 due to global trade tensions, despite its relatively strong position. The country's higher dependence on domestic demand and a resurgence in government spending will provide crucial support. However, the impact of weaker external demand will inevitably moderate India's overall growth trajectory.
ADVERTISEMENT What high frequency indicators are you monitoring closely because one of your reports highlight that there has already been a sharp decline in the US-China trade activity – about 33% year-on-year – in the cargo carrying container ships. How reliable are these high frequency indicators when things are so much in flux right now?
Chetan Ahya: There is a lot of uncertainty around the reliability of that data because like for example you mentioned about the container traffic, but we also look at this data on shipping activity which is called port calling data. It is the number of ships at the port in and out loading and unloading, that data is actually showing that for India and Asia ex-China there has been quite a nice rebound in that shipping activity.
Asia ex-China, in aggregate is growing at about 5% year-on-year that is where it was before April 2 tariffs. So, during the period immediately after the April 2 tariffs, it came down quite sharply, but it is now back up. I would caution against that number saying that everything is back to normal because there is a large amount of blank shipping or empty ships that have been moving around and that data is available separately, that number has gone to a new high right now. Also, we do not know the capacity utilisation within ships. So, I would just be a bit careful about thinking that everything is back to normal.
Also, from a framework perspective, eventually there will be a negative effect of this capex showdown. In 2018-19, from the time the tariffs were imposed, it took about four months for it to show up in the hard data which is the capex data. For tracking capex, we will be using monthly capital goods imports data that comes out from the trade data in Asia and as you know Asia trade data comes out much earlier than US and Europe.We think that could be a nice live barometer of what is happening in the capex cycle and so for the month of April, we will know the data by the middle of May. Similarly, in May, we will know by the middle of June. But our current assessment is the June hard data point considering that it will be four months from the time tariffs would have been imposed should show that meaningful slowdown in capex data.
Other than central bank action which we have already seen in terms of rate easing and even the liquidity push to the banking system from the central bank, what other tools do you think the government has currently available to try and pump up the economy?
Chetan Ahya: From the central bank perspective, tariffs are deflationary to the extent to which it is slowing down global trade. Global commodity prices have also softened and it will affect capacity utilisation in India and the manufacturing sector across the region. So, there will be disinflationary pressures emanating from the region. There will be domestic disinflationary pressures because of decline in capacity utilisation. It is relatively easy for the central bank now and we had some supply constraints on the food sector and food inflation was high and that has also now come back below 4%.
ADVERTISEMENT We think that the central bank will be able to take adequate monetary easing to support growth. We are expecting that the central bank will take up liquidity injections. It will cut interest rates and as it has already started to do, it will take up some more regulatory easing as well. So, on all three fronts, you should expect the central bank to take action. From the government side, my personal preference would be that they defer the consolidation of the deficit. Right now, we are still building in fiscal consolidation because that's what the finance minister has repeated, but to the extent to which there will be some loss of revenue with growth slowdown. If the government decides to be on the consolidation path, it will have to come out at the cost of reducing expenditure or expenditure growth. It would be better to keep capital expenditure growth strong to offset this downside pressure from external demand slowdown and potentially private capex slowdown.
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You have warned of potential spillovers, such as weaker job creation, suppressed consumption and interestingly and intriguingly, banking sector risk aversion as well. Which Asian economies – and if you think India is also part of that pool – are most at risk of these non-linear effects and how might they manifest themselves in the latter part of the year.
Chetan Ahya: In general, the approach that we have taken is to just look at goods exports to GDP because as I mentioned earlier it is not about bilateral issues that any country has with the US, there is going to be a global capex slowdown, there is going to be a global trade slowdown. So, the best parameter to watch would be who is more exposed to global goods exports. Therefore, we look at exports to GDP ratios and on that parameter India has the lowest goods exports to GDP at 12% and some of the mid and smaller size economies in the region which is the likes of Korea, Taiwan, Thailand, Malaysia they will be relatively more exposed. China's goods exposed to GDP is at a moderate level at 20%. But China has a very high dependence on net exports for its GDP growth. For instance, in the first quarter of this year, they just reported that 40% of their growth came from net exports. Last year, in the fourth quarter, 45% of their growth came from net exports. We overlay exports to GDP ratio with the dependence on net exports. And since India is running a modest current account deficit, it is less reliant on net exports as well as a big driver to growth whereas China will add to that list of economies which will face significant downside pressures in this environment of trade tensions.
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You have also talked about a quick resolution of tariff uncertainty and that could bring upside risk to the growth outlook as well. Tell me what a quick resolution is going to look like in terms of timelines and tariff reductions and how much could it boost Asia's GDP growth in 2025.
Chetan Ahya: We were building in some slowdown, but we have additionally cut growth rates by about 50 to 70 basis points depending upon the economy in the region on account of these last round of trade tensions which were basically taken up on April 2nd. If you now see a complete reversal of that in the next four to six weeks, as I was mentioning earlier, you could go back to the original path that we were forecasting, but it is still going to be very optimistic to assume that there is going to be a complete reversal and in four to six weeks' time we are back to where we were before April 2nd.
You just highlighted how India is still isolated and cocooned from the impacts of tariff implementation. It seems that India perhaps could be the first country that there could be a tariff handshake on when it comes to the US. What is your standalone view on how India's economy has been? What has the Reserve Bank of India been doing in trying to combat and control inflation at the same time try and instill growth as well?
Chetan Ahya: We think India is doing well on a relative basis, but on an absolute basis everybody is going to take some pain and as I mentioned for India, we are building in a 50 bps growth slowdown from 6.2% on a quarterly trajectory to 5.7% over the Q4 period. That is going to be still something that cannot be avoided because India is still sitting in this world connected with the rest of the world. The part that is good in India is that there is a structurally higher dependence on domestic demand versus external demand and at the same time there was a bit of a blip in the government spending because of elections last year that has come back.
The support from government spending is going to be quite critical in this environment and hopefully, we do not see a compromise on those target numbers that were laid out in the budget on capital expenditure. So, India's domestic demand dependence is high and that is on a structurally higher path and that is going to be an offset but net-net because of this challenge on external demand from trade tensions, India's growth will also moderate.
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