Why Morgan Stanleys Ridham Desai Sees This As Indias Decade

India is set to lead a "staggering 20% of global growth" by the end of the current decade, as it moves towards a growth model focused on encouraging investment and leveraging exports, according to Morgan Stanley's Ridham Desai.

"We are right now at 3.5% of global GDP. We will drive a fifth of GDP growth in the world. So, there's no way a chief executive officer or an equity market investor can ignore this country. He or she will have to be engaged," Desai, managing director at Morgan Stanley India, told BQ Prime.

India is currently a $3.5 trillion economy, he said. "By our estimates, we're hitting $7.9 trillion by the end of the decade. We're adding more economic output than we've added since this country was formed."

This growth will also lift per capita income in the country, moving closer to the East Asian growth model that has proved successful for many economies, he said.

"The growth is inverting the income period," Desai said. "Currently, at the top is the upper-most layer, which is households that earn more than $35,000 per year. That number is 5 million. At the bottom, we have people that are struggling to make ends meet. This is inverting when at the top, that number goes from 5 million to 25 million. This is exactly what happened with China a few years ago. India is on the verge of that transformation."

Desai said that the 4Ds—demographics, digitalisation, decarbonisation, and deglobalisation—as global trends, are favouring India, which will possibly make it the "world's third-largest economy and stock market before the end of the decade".

Watch the full conversation here:

Edited excerpts from the interview:

I will read out a couple of lines from a note that I read recently: Conditions are in place for an economic boom fueled by offshoring, investment in manufacturing, the energy transition, and the country's advanced digital infrastructure… And in a world that is currently starved of growth, the opportunity set in India must be on global investors radar. These are two sentences in a 127-page report by team Morgan Stanley. One of the chief architects of this note, Ridham Desai, joins us. What's the bedrock of the statement that this is India's decade and this note as well?

Ridham Desai: I actually look at India as a quintessentially self-help story. In a world that is highly challenged and it's not about the Russia Ukraine war, it's about a world that is facing four Ds– one is Demographics, it’s ageing, it is really ageing and when Elon Musk says that population is a bigger problem than climate change, I kind of agree with him.

It is very hard to reverse population declines and some major population declines are likely to happen in the coming years.

The second is decarbonisation. As the war is proving, it's not going to be easy path and the conviction that the planet had on decarbonisation is going to get rattled in the coming months, especially if the war doesn’t turn its back and even if it doesn't, what countries in Europe have experienced, for example, is certainly going to reset their thinking.

The third is digitalisation. This is a disruptive force. It's going to take some businesses down and you know, every two or three decades disruptive forces happen. I don't think the disruption of the 2020s Is anything special. I always point to the 1870 decade for the peak of disruption. That was the decade in which man invented the internal combustion engine, the telephone, and the electric bulb. It forever changed how we moved. It forever changed how we communicated and of course the electric bulb had its own implications. So, can you imagine these were probably amongst the biggest inventions of the industrial era and they all happened in a single decade? So, you can imagine what it did, right?

But, digitalisation is a force that we have to currently reckon with, and it's going to have some disruption. So, these changes that are happening in the world are likely to challenge how the world progresses.

In the midst of this, India is actually making its own story. So that's why it is quintessentially self-help. So, there are three things that are happening and those are based on four foundations and three out of these four foundations are India's own doing.

The first foundation is the multipolar world thesis that we have as Morgan Stanley, which is essentially the world was bipolar. China dominated production, U.S. dominated consumption–now it is becoming multipolar, and it's going to spread out. India is a big beneficiary of that. India will receive some of those production investments for many reasons, amongst them, including the fact that India is also a growing consumer market. So, it's an attractive destination to put up a factory and the government is feeding this with its tax incentives, etc.

The second is our commitment to the Paris Accord, which means that we are now committed to Net Zero in 2070, and there is a massive investment happening in renewables. Now, this may not have been thought about at that time or maybe it was thought about, but the implication of this is that we are liberating ourselves from the volatility in the energy markets, which brought us down to our knees in 1990 when Iraq decided to attack Kuwait.

I always consider Aug. 2, 1990, as a very important date in modern Indian history, as important as any date that you can think of, because that day when Saddam Hussein decided to attack Kuwait and oil prices doubled, basically, our balance sheet went bust. We had to go to the IMF in the subsequent months, and the IMF put this condition that you got to open up.

Otherwise, on our own, we may not have chosen 1991 as the year to open up. Maybe it would have happened in 2021. So, therefore, the signing of the Paris accord is a seminal moment. Then, Aadhaar and hats off to Mr Nandan Nilekani. I keep speaking with him about this. It’s a single-man genius to have come up with this concept and it went through its own ups and downs. We wrote about this extensively in 2017. But this whole digital infrastructure is very unique to India. No other country has this system.

The fourth thing is the shift in government policy, which has taken many years, but we are now entrenched in a policy that is targeting to lift the share of profits in GDP. Therefore, fueling the investment cycle, creates jobs, creates wages and creates a virtuous cycle of growth.

So, these are the foundations to what happened to be three pillars that are driving India's decade or the new India, as we call it.

One is offshoring, so we are gaining from this global multipolar world thesis, which is shifting production to India.

Even while Covid was such a bad thing, the silver lining on the dark cloud was that the CEO in a typical MNC in the world suddenly became comfortable with work from home and then it is actually much better to work from Mumbai than Florida, at least it's a lot cheaper. So, jobs are shifting to India as a consequence.

So, we were already there in the services exports market, but our market share in the last few years has gone up by 60 basis points from 3.7 to 4.3. It's a big increase in market share in a two-year time frame and this is going up further.

The second pillar is the energy transition. So, in part because of the Paris accord, a lot of our incremental energy needs will be met by renewable sources, mostly solar and hydrogen.

The second thing is that over the past 10 years, we have increased our access to energy. See, energy consumption is not only about prosperity, but also about access. In fact, it's very intertwined with economic prosperity. The fact is that numerous villages, hundreds and thousands of villages in India did not have electricity. Now, all of our six lakh plus villages have electricity. This is going to lead to a big transformation in energy consumption.

We are making an estimate that our per capita per day consumption of energy in all forms, which includes electricity, transportation fuel, food, goes from 950 watts to around 1,500 watts, so about a 60% jump in 10 years. Just fathom the comparison. The U.S. is at 9,000 watts. So, the average Indian right now consumes about nine 100-watt bulbs in a day. That's going to go to 1,500 watt bulbs a day and that is such a big transformation that is underway.

It will have multiple implications on growth, macro stability, inflation, fertiliser subsidy, coal storage chain, the way we consume food, the way the food reaches our plate... We have not even touched the tip of the iceberg in this report because that requires another 150 pages for me to deal with.

The third is the digital infrastructure which is on the India Stack. At the bottom, we have Aadhaar, which is your e-KYC and then we built the Digi Locker layer. Then, we built the E-sign layer. Nowhere in the world can I sign a document in the cloud like I can do in India. I can sign my property document in the cloud, rental document in the cloud. On that, we built all these payment layers, which is UPI, Fast Tag...

Fast Tag is revolutionary, it's a layer built on the India Stack and now, there are these three big layers coming on it, which are very disruptive. One of them is ONDC, which is our digital commerce layer. It will change the way e-commerce is done and the world will look at us with awe because we are unbundling the e-commerce experience.

Today, when you do an e-commerce transaction, it is bundled. The e-commerce website will offer a range of products to you from specific vendors, you will have to pick up that, then it will decide for you how it is going to be delivered and it will decide for you how you will make your payment. In the ONDC world, everything is unbundled. First of all, you are not limited on product range, by the vendors you choose. You may want to pick up the product from your next-door kirana store or from a dry fruit store in Kashmir, Srinagar. And then, the way it has to be delivered to you, you will decide and the way you make the payment is also your decision. So, the whole experience is unbundled.

The next layer is …the credit enablement network and that is going to change the way we lend money. I was actually discussing this earlier today. I sit on the advisory board of an NGO called Project Mumbai and we were discussing this thing that the government essentially is pushing state governments to create more lending to hawkers, and the Maharashtra government apparently is now on board with it. So, there are maybe hundreds of thousands of hawkers in Mumbai who have no access to formal credit. Why? Because they have no asset on which they can make a pledge, because all our lending is asset-based and the Open Credit Enabled Network or OCEN will become cash-flow based.

Now, the Vada Pao guy sitting on Backbay Reclamation, that famous guy today doesn't have an asset to pledge, he cannot grow his business without credit. He can pledge his cash flow and because he's taking payments on UPI, he's got a record of cash flows, he can prove to the bank that ‘I am making so much money in a day’ and the bank can rely on the record. If you are filing GST, if you are filing income tax returns it’s even better, because all those things are on the India Stack, and you can actually make a credit decision. A very sound credit decision.

So, this will revolutionise credit and the third layer is on health, which again, we only touched upon very briefly in this report because that is another major change. But it will have an impact on how we do insurance. Again, it's going to be quite unique to India. So, these three big idiosyncratic pillars give us the confidence that we are heading into maybe a decade, two or three, of India's dominance of the world.

We did some estimates using my global colleagues. India will be in the next decade, according to our estimates, a staggering 20% of global growth. Digest that, one-fifth. We are right now 3.5% of global GDP; we will drive 20% of GDP growth in the world. So, there is no way a CEO or an equity market investor can ignore this country. He or she will have to be engaged.

Digest another number–we are $3.5 trillion dollars. By our estimate, we are hitting $7.9 trillion in 10 years. We are adding more economic output than we have added since this country was formed in 10 years. So, just imagine what this is going to do.

But it is inverting the pyramid, the income pyramid. The lowest layer and the poorest layer is the biggest, the uppermost layer is the smallest, obviously that's how an income pyramid is and at the top, which is households that earn $35,000 a year, the number is 5 million. So, India is not an attractive market for luxury goods because that doesn't mean it has enough demand for a Louis Vuitton or for a Cartier.

At the bottom, we have people who are struggling to make ends meet. They are just barely going past roti-kapda-makaan. They earn $1,000 a year on a per capita basis, that's just enough for them to have life. This is inverting.

… At the top, that number goes from five million to 25 million and a few companies have already caught on to this. So, Louis Vuitton and Cartier both now have their global ambassador as Deepika Padukone, because they can see that this is going to be the market in which they will sell more stuff than any other market. This is exactly what happened to China 20 years ago and India is on the verge of that transformation.

At the bottom, these people rise, they will start painting their homes, taking their kids to school, start buying internet connections, start buying better mobile phones, etc. So, there's a whole transformation happening to consumption. I am so excited. It's unbelievable.

These days, when we do Twitter Spaces, people ask me how is it that we can invest into India? What is the most efficient way? Is there an index, is this index better than that.

Ridham Desai: Thank God, the access is not so easy. One of my biggest fears is where everybody joins this party, and we get a bubble, and bubbles are bad because they crash and when they crash, they leave a lot of scars. So, we rather have these people come a little later to the party because right now our own brethren, our retail investors are on top of it. Let them get exhausted because for the time being if both foreigners and domestic start bidding stocks, then these prices are not going to stay sensible any more.

This has happened because in 1992, we had a bubble in India. The market was trading at 50 times earnings and it crashed. And the scars were so deep that a whole generation of retail investors shunned the equity markets, and they needed that whole generation to pass before equity investors returned to Indian equity markets. So, let it happen more slowly, it will be more enjoyable.

In your report, a number of times you have spoken about the India Stack and how it moves us from a pre-paid economy to a post-paid economy. Can you talk about the significance of this?

Ridham Desai: It's actually Nandan’s phrase. So, I have stolen it from him. I have stolen a few things from him actually without asking him. But pre-paid to post-paid is essentially what we saw in the mobile world, which is you first paid for the services, and then the service was delivered to you. Now, there are multiple reasons for that.

One primary reason is that there is no credit available. So, you cannot have a post-paid economy. Post-paid means I will pay for it later, which means today you give me a loan, give it to me on credit and I'll pay for it later. That can only happen when there is access to credit and that's what India Stack is going to change.

The numbers are very attractive for India because private credit to GDP is 57%. So, it's pretty low. Just to contextualise this, that number is 225% in China, four times more and of course, India's per capita income is lower, so it ought to have lower credit.

…corporate debt to GDP is just 46%. Okay, and therefore, there's a lot of scope to this to rise and that's what will happen in the next 10 years because access to credit improves…

Incomes are rising, so people will spend their future. See, when you take a loan, you are spending your future. But in this country, we have never spent our future. My father never borrowed money. In large part, I have never borrowed money. So, we never spend our future, we only spend our current income.

Whereas in the U.S., people have spent their future, which is one of the big problems that we have in the world–the indebtedness is very high. So, India will see that because the capacity to spend the future only arises when you have access to credit and that is what the India Stack is enabling.

The other question is on the energy transition. When you are talking about this whole move that will happen, we will consume more, are you trying to emphasise on the way the spend that happens into the energy revolution that comes in or India's dependence going down on globally imported fuel sources, which leads India to have a better quality of life, but with power sources which are indigenously manufactured?

Ridham Desai: Both of them are happening simultaneously and that's never happened in the history of the world. Never happened. It's going to be the first time the world will witness a transition in energy in terms of consumption and sources. So, we have seen source transitions, like the electric bulb was a source transition from gas to electricity.

And then, we went to auto fuels. That was another source transition that happened from horses. So, if you were consuming horse energy and then we went to fuel energy. But in India, not only is an energy transition happening, but we were also seeing this big transition in the level of consumption. That's very simple to understand.

You look at the penetration of refrigerators in India, for example. We don't have refrigerators, and it will get refrigerated because as incomes rise, people will buy refrigerators, air cooling and air heating. We don't have that. It's not ubiquitous, it's not easily available.

These are very simple and basic things in the western hemisphere. They are luxury goods for most Indians. So, that is going to change in the next several years as more people rise up the income pyramid.

All these are energy-intensive utilities, so they will consume energy. The other source of energy consumption is travel. There's going to be a major boom in travel both internal and external and that is also possible only because incomes rise.

So, it is circular. As we have said in the report, energy access and prosperity are circular. The more you give energy, the more prosperity you get, because the more you travel, the more jobs you create; the more jobs you create, the more you travel.

So, travel is going to boom. Vacations will boom. Okay, so that's one thing and then the source, which is it's transitioning to renewables. Now, this is somewhat forced upon us, but it's also something we want to do because we have been too vulnerable to global energy cycles and this is a good point for us to liberate ourselves from that.

You reckon in your assumptions that over the course of this decade, a large portion of that will become domestic-oriented, so to say?

Ridham Desai: Yes, so our estimates are slightly less optimistic compared to the government, which I feel comfortable with, but maybe we are underestimating this move.

Because some really large private sector companies are engaged in this, and I cannot see why and how they are going to be unable to deliver it.

There are lots of debates, especially around hydrogen, but they will probably get addressed in the next few months and they will become a viable fuel source for India. So, you know, this is possible.

India is endowed with very good natural conditions for renewable energy. We have just not tapped it, now we are tapping it.

We have sunlight in 80% of our country, for 80% of the year. Very few countries have that. So, we have a very large coastline. Wind energy is not as effective, but it is possible in India more than almost anywhere else. So, this is something we have not tapped into. Now, we are tapping into it, so I think it will happen.

To quote an ex-colleague of yours, if oil is the new data for the decade, and if India still relies on imported energy, and if energy prices stay higher and elevated, then that could prove to be an Achilles heel?

Ridham Desai: Absolutely. All this doesn’t take that away, because this transition happens like this, right? We are not there; we are still here, and energy prices can go like this now. So that is going to be disruptive, and it will cause pain.

We have become a bit more resilient to it than we were in the past. It is largely because of the way our external balances are being funded. It's largely FDI now and not FPI. Portfolio investors tend to be highly sensitive to short-term fluctuations in energy prices and have in the past reacted adversely to rising energy prices and caused disruption to both markets and macro. It’s not happened this year.

The consensus view in February was India is going to be in trouble because of the war, energy prices will rise. Nothing of that sort has happened because the funding on the external side is very stable. It’s long-term funding, which is less sensitive to oil, so 50% of the problem has been resolved. The other 50% of the problem is that we still import energy and therefore, that will get resolved over time, but till the time it's resolved, it is still a risk factor.

Does execution remain a challenge in all of this optimism or rather the assumptions that you have made?

Ridham Desai: So, those are the pros and cons of the democratic institution that we run and the manner in which our Constitution was set up. Our forefathers when they wrote the Constitution, in their wisdom, decided that land, labour, agriculture and electricity are going to be state subjects. So, it's not for want of effort at the Centre. They have tried very hard to change these things. But the consensus in the state doesn't arise because each state has got different priorities.

So, those hiccups will come along the way, and they will have to be negotiated and they could cause some delays and some of it is embedded in our forecast. Therefore, there is a bull case, and there's also a bear case that if things really go nasty…

I don't know what the 2024 election outcome will be and we have voted minority governments in the past. If we decide to vote another minority government for whatever reason, it could slow down execution and then we go to a bear case.

So, we are discussing the base case, but there is a bull and a bear scenario as well. If we execute exceedingly well, then we will head to the bull case. If we don't, that will head to the bear case, but the bear case is also not very bad.

We will come out on top, in the sense that we still end up being a top three economy in the world because the rest of the world is shredded right now. So, we are still looking okay, except that the gap to number two will be wider than what we have in our base case.

What do you think is the best way to play this optimism that Ridham Desai and Team Morgan Stanley are putting out in this note?

Ridham Desai: So, there are four sectors that seem to be the biggest beneficiary. The first one is financials because there is a large amount of credit growth that we are sensing, and India's fintech is developing very differently from the rest of the world. So, there's a lot of partnership between the banks and the fintechs, so they are not as disruptive.

At the end of the day, the bank makes money out of its liability franchise and credit risk decisions. So, these are the two most important ingredients to a bank and that it's going to be very hard to compete against the well-run banks, so they will win along the way.

In that, I will also include a host of other financial services because when we say financials, everybody feels only banks, but there are a lot of other things that are happening like exchanges, like credit rating agencies. There are a slew of financial services that are not necessarily balance sheet based and those are also very attractive businesses, and they all grow along with the entire economy.

Second is discretionary consumption and pick your spot there because as I said, …travel, education to media, a lot of things are going to do well. When you are investing, of course, you have to assess that business model per se, and that's a different exercise. So, I am only talking top down here. I am not talking about specific things that you have to actually end up doing in order to make a good investment call.

Page number 71 in your note speaks about evidence of this being there from 2011, where there is a change in pattern of how India is consuming discretionary versus food versus something else.

Ridham Desai: So, the change is underway, and those changes will accelerate as we go into the next 10 years. So, that is absolutely right.

The third is industrials because there should be a fairly strong capex cycle and that is something we will watch out for. This capex cycle is crucial for earnings growth, because earnings are intricately linked to investments, until the investments become unproductive.

…Balance Sheets in India are depleted of capital stock. There are lots of new investment avenues that are emerging. So, industrials should do well.

I will add a sector which is not doing well right now, which is under a bit of cyclical pressure which is IT services because digitalisation that the world is doing is right at the doorstep of Indian IT services companies.

Nobody is capable of delivering at scale, at those prices, the type of stuff that companies around the world need in the next five-10 years to respond to the shifts that are happening in the marketplace. So, Indian companies will be there.

We will see in this possible U.S. recession how they actually end up behaving, but they will not be as bad as previous U.S. recession cycles because some of this demand on digitalisation is structural in nature. It will withstand the Western world recession.

There may be some slowdown, but it will not be a stop. Therefore, the revenue implications for Indian companies may not be as bad.

In the note, you mentioned that in the coming decade, the number of people employed in India for jobs outside the country is likely to at least double to about 11 million. Are you talking about people choosing India as a workplace destination or are these outsourcing jobs?

Ridham Desai: It is outsourcing; these are direct outsourcing jobs. Around this, a lot of other ancillary jobs get created. So, it doesn't include that number. Multiply this number by four or five to arrive at the actual job creation that gets created only from offshore.

If India does well, not just for this decade, but as you said in your opening preamble, maybe two or three decades, then we are looking at a vastly different country than what we have experienced in the last X number of years?

Ridham Desai: You know, we are already a vastly different country. We tend to run down ourselves and we are very harsh on ourselves.

I have lived the last 30 years and we are completely transformed. In 1989, I had stupidly taken a car ride to Vadodara. It took me 13 hours to get there. In 2021, I did the same car ride in 5.5 hours. That's a lot of progress. Just do the compounding. You know, it's fantastic progress. That's a lot of progress for the infrastructure. We just run ourselves down thinking that we know we're not making enough progress, but we have.

Could we have done better? Of course, we could have done better and there are many flaws. There are some deep flaws, but slowly, those are getting fixed.

You have to be optimistic if you are in the equity market. Otherwise, you can do something else.

But India is on a solid path. We have a very deep-rooted equity culture in this country. We have risk takers everywhere. It's always been there in our blood and that's a good thing for the economy. And you need a little bit of government support. You need a little bit of luck and then you will arrive there.

For a large country like India, there need to be a bunch of things that need to happen for it to get really transformed. Your note speaks about a clutch of options. This ONDC thing is the most well-known. There are a few things that I didn't know. For example, that people are getting an SMS for the monies that have to be transferred because they may not have bank accounts and therefore, QR code.

What would you believe should be the one thing, never mind the hiccups, if that were to happen, that will really mean miracles?

Ridham Desai: Okay, so as a nation, our biggest problem is and our biggest advantage is our agricultural sector.

350 million acres of farmland, 50% of this country's landmass is being used to grow food. 137 million landowners, farmers, plus another 120 million non-landowners who also do farming. So, approximately 50% of our workforce sits on these farms, and in all they produce 15% of total output because that's the share of agriculture in GDP.

So, from a macroeconomic perspective, if we could fix this, we will be in a runaway growth. Just imagine if you could just fix this.

Either consolidate land holdings, because today, the average farmer in India owns just 2.5 acres of land and millions of farmers own sub one acre. You cannot bring irrigated water to such plots, you cannot apply tractors, you cannot apply any scientific inputs to this. Therefore, the productivity of this land is subpar. If you could raise productivity by whatever means, which could be consolidating the land or whatever it is, we will feed half the world.

I don't remember the exact answer that Manish Chokhani had given me two years back, but he was of the opinion that instead of trying to work towards a profession, which has got a bunch of disguised unemployment to itself and the productivity is not very high, we need to move a lot of rural population to urban money creating jobs, because this will not improve by itself as it is.

Ridham Desai: ...If you created opportunities elsewhere, then a lot of these people will leave their farmlands.

We have laws in this country, which make it impossible for a farmer to sell land to a non-farmer. If that changed, then that farmer can exit the current business that he or she has and go into a new business. So, either way, you create that environment which fixes the farm sector productivity.

I am not prescribing the solution here. There are multiple ways of doing it. Manish Chokhani’s approach is one way. The other approach is consolidation. The irony of this is that it's largely a manmade problem. It's not a natural problem, it is a manmade problem created by laws. It's not a problem created by nature.

In fact, we are so well-endowed, I don't think any country on the planet has 50%, any large economy. Smaller economies have, like Tanzania, Kenya. But we have 50% of our landmass in agriculture, 20% of it in forest land, 70% we only grow plants. It's incredible. So, we have 1.4 billion people who live on the remaining 30%. So, our population density is about 12 or 15 times more than America. Digest all these things.

But again, that's not the problem. The problem is farm sector productivity is poor and it needs a serious lift and if it gets lifted, we will liberate ourselves from a lot of problems that we have.