Is Morgan Stanley Increasing India's GDP Growth Forecast Due to GST Cuts?

New Delhi, Sep 1 (NationPress) Morgan Stanley has elevated its projections for India's GDP growth in the fiscal year 2025-26, stimulated by an impressive growth rate of 7.8% in the April-June quarter. The firm anticipates that the anticipated reductions in GST will enhance domestic demand, compensating for the decline in exports resulting from the US tariff increase.

"We foresee that the upcoming GST cuts, coupled with the festive season and robust rural demand, will significantly boost domestic consumption. Consequently, we predict a shift in the growth composition, with a decline in public expenditure, weakened external demand (especially in goods exports), and a rise in private sector activity," the report stated.

"Our analysis suggests that the external demand may exert an additional drag of approximately 50 basis points (bps), which could be counterbalanced by potential GST reductions, enhancing growth by around 50bps," it further explained.

The report emphasizes that favorable monsoon conditions and high kharif sowing levels reflect resilience in the agricultural sector, likely fostering strong agricultural growth in the near future.

For the financial year 2025-26, Morgan Stanley has adjusted its real GDP growth forecast upwards to 6.7% year-on-year, an increase from the previously projected 6.2%.

The report indicates that GDP growth surged to 7.8% year-on-year during the April-June quarter of the current financial year, rising from 7.4% in the January-March quarter. The internal metrics reveal that both government and private consumption accelerated to 7.5% percent and 7% percent year-on-year, respectively, while gross fixed capital formation eased to 7.8% percent but remains strong relative to previous quarter levels. Sustained rural demand, supported by favorable monsoon conditions and improving real wages amidst declining inflation, has contributed to heightened consumption levels, according to the report.

Furthermore, the government has prioritized spending on both revenue and capital fronts in the quarter ending June '25, which has bolstered consumption and investment.

Net exports have become a hindrance as imports expanded more rapidly than exports, despite a relative increase in export growth compared to the last quarter. This rise in exports was attributed to a potential front-loading of shipments to the US ahead of the tariff implementation, while shipments to other global markets slowed during the April-June quarter, as noted in the report.