India is seen as the most favourably positioned country in Asia for economic growth amid ongoing global trade tensions, according to a Morgan Stanley report. The outlook is supported by strong services exports, low reliance on goods exports, and government policies that promote growth. Easing monetary policy and rising domestic demand are also expected to boost economic performance despite global headwinds.
India stands out as the most favorably positioned economy in Asia for growth, even amid ongoing global trade tensions, according to a recent Morgan Stanley report. The report by New York-headquartered investment bank attributes this outlook to India’s robust services exports, minimal reliance on goods exports, and a supportive policy environment.
While trade tensions are expected to weigh on Asia’s broader growth prospects, India’s low goods exports as a share of GDP reduce its exposure to global trade disruptions. At the same time, strong and growing services exports offer stability amid external uncertainties.
Even if the global economy weakens further, India is expected to outperform its regional peers. Its resilient services sector and strong domestic demand, coupled with favorable policy measures, position the country as a leader in Asia’s growth trajectory. Despite risks from global trade tensions, India’s economic fundamentals and policy support will help it remain a top performer in the region, Morgan Stanley report reaffirmed.
The report stated, “In the event of a sharper slowdown in global trade, India will also be a relative outperformer considering its goods exports to GDP are the lowest in the region and its services exports tend to be more defensive with an offset from continued gains in market share.”
Indian economy, on its path to recovery
India’s growth rebound has been slower than anticipated, Morgan Stanley report noted. It stated that the recent slowdown in India’s economy may be attributed to an “unexpected double tightening of fiscal and monetary policy.” It said that such measures are typically implemented by policymakers in emerging markets to address macroeconomic imbalances like rising inflation, a widening current account deficit, or a sharp increase in the private debt-to-GDP ratio.
Chetan Kishore Ahya, Chief Asia Economist, Morgan Stanley said, “Government spending – which accounts for 28 per cent of GDP – contracted by 6 per cent at the trough in Jul-24 on a three-month trailing basis amid elections, and then recovered at a slower-than-expected pace post-elections, especially on the capital expenditure front (which averaged 12 per cent in May-Nov 24 but has now recovered to 37 per cent 3MMA in Jan-25). Monetary policy was tightened on all three fronts of policy rates, liquidity and regulatory measures.”
However, despite this temporary setback, the global agency remains optimistic about India’s recovery prospects. The report forecasts a rebound in economic momentum, driven by multiple contributing factors.
Morgan Stanley report emphasized the role of proactive government policies in strengthening domestic demand. After a period of tight fiscal and monetary policies that had slowed economic activity, India is now witnessing a recovery fueled by policy reversals. The Reserve Bank of India (RBI) has contributed to this rebound by easing monetary policy—cutting interest rates, injecting liquidity, and loosening regulatory norms. These moves are set to boost lending, spur investment, and support economic momentum.
The Monetary policy has begun to ease, with the Reserve Bank of India (RBI) cutting policy rates and injecting liquidity into the system. Financial conditions are improving as a result, with the weighted average call rate falling by 43 basis points since December 2024.
Morgan Stanley report noted that since December, the RBI has been moving toward a more flexible foreign exchange rate regime while also taking steps to improve liquidity conditions. The central bank has been employing measures such as open market operations, variable rate repos, and USDINR swaps. It has also started easing regulatory restrictions on non-banking financial companies (NBFCs).
As per the report, government capital expenditure is expected to grow by 10.1% in FY2026, while overall capital spending—including grants to state governments—is projected to rise by 17.4%. State governments are expected to drive the next phase of public capex recovery, the report said.
The report highlights a strong rebound in government capital expenditure, which grew by 67% year-on-year on a three-month moving average basis as of January 2025. Looking ahead, the central government’s FY2026 budget aims to raise capital expenditure to 4.3% of GDP. Total public sector capex—including state-level spending—is projected to increase by 17.4%.
In addition, food inflation has moderated significantly—from 10.9% in October 2024 to 6% in January 2025—potentially boosting household purchasing power and supporting consumption-led growth.
The report also noted that private sector investment continues to lag, weighed down by ongoing global uncertainty. It stated that the recovery in private capital expenditure is expected to be slow, as global uncertainties are likely to weigh on Asian economies, along with the broader trade and investment cycle. A slowdown in goods exports may affect capex in India’s manufacturing sector. However, the impact is expected to be modest, given India’s limited exposure to global trade.
The private consumption, as per the report, has recorded steady growth of 6.9% year-on-year in Q4 2024, supported by stronger rural demand and tax cuts totalling ₹1 lakh crore. The fast-moving consumer goods (FMCG) sector also saw a notable uptick, with volume growth rising to 7.1% in Q4, up from an average of 3.5% in Q2 and Q3 of 2024. A strengthening job market has further contributed to the recovery in consumption. Additionally, easing inflation is expected to boost real income, further supporting household spending and driving broader consumption-led growth.
Impact of US tariffs
Many Asian countries are concerned about the potential impact of US tariffs (effective from April 2), and India is among those at risk as it imposes quite high tariffs on some imports compared to many countries in the Asia-Pacific region. With a US$ 46 billion trade surplus with the U.S. and relatively high average tariff rates, India could be a key target for reciprocal tariffs, especially on pharmaceutical exports, which currently represent 2.8% of India’s total exports and 0.3% of its GDP.
Although a U.S.-India trade deal is anticipated by the end of 2025, India could face elevated tariffs in the meantime. This indicates that the country may be unable to avoid the reciprocal tariffs scheduled to take effect on April 2nd, with the possibility of further tariff hikes until the agreement is finalized. However, the report highlights that despite this challenge, India’s services exports remain a vital strength. In January 2025, services exports reached US$ 414 billion—accounting for 10.8% of GDP and nearly matching merchandise exports of US$ 426 billion. With a 14.1% year-on-year growth in January, the services sector is helping to cushion the impact of potential trade disruptions.
