There could be a multitrillion-dollar opportunity waiting in India, Morgan Stanley says

Key Points
  • India's push to digitize its economy could be an investment opportunity worth trillions, investment bank Morgan Stanley said
  • Tracking the credit history of individuals or small and medium-sized businesses is expected to become simpler, which will lead to credit flowing to the right part of the economy, a Morgan Stanley executive said
  • India's GDP will reach $6 trillion in 2027 if its digitization drive succeeds, according to the bank
Morgan Stanley: India's digitization drive will spur growth

India's push to digitize has seen its economy undergo massive changes, but that presents a multitrillion-dollar investment opportunity as both tax compliance and access to credit increase, according to Morgan Stanley.

Prime Minister Narendra Modi's push to digitize the Indian economy has seen the introduction of Aadhaar — a unique identification number based on biometric information issued to residents of India — and attempts to reduce dependency on physical cash, although last November's surprise demonetization drive caused plenty of disruption.

Still, as the Indian economy returns to a sense of normalcy, the country could be set to reap the benefits of those reforms.

"The good thing with digitization, apart from bringing more cash into the economy ... is credit," Anil Agarwal, head of Asian financial research at Morgan Stanley, told CNBC on the sidelines of the bank's Asia Pacific Summit in Singapore.

India's problem, Agarwal explained, was that most lending that occurred in the formal sector went to large corporations or mortgages as banks did not have access to data on individuals or small and medium enterprises (SMEs) that wanted to take out loans.

As the adoption of digitization improves, tracking the credit history of individuals or SMEs is expected to become simpler and that's likely to give a boost to the economy.

"[T]hat will allow banks to be able to lend much more effectively, so the credit will flow to the right part of the economy," Agarwal said.

A sign informs customers they can pay using digital payment methods outside a clothing store in Bengaluru, India, on Feb. 4, 2017.
Dhiraj Singh | Bloomberg | Getty Images

"Our view is that that creates employment opportunities, that increases GDP per year by about 50 to 75 basis points, so GDP growth [on a] real basis is 7.1 percent, nominal is around 11 percent. That means economy and markets can do very well," he added.

Morgan Stanley forecasts India's GDP to reach $6 trillion in 2027 as a result of its digitization drive. That would make India the third-largest economy in the world, behind the U.S. and China, which recorded $18.5 trillion and $11.2 trillion in GDP, respectively, last year.

Digitization also paves the ways for the country's equity market to become one of the world's five largest, with a market capitalization of $6.1 trillion.

The bank isn't the only one optimistic about the impact of Modi's reforms on the country either.

India's sovereign rating was upgraded by Moody's Investors Service for the first time in 14 years to Baa2 from Baa3 on Friday. "The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential," Moody's said.

The rating agency highlighted the new Goods and Services Tax as a measure that will "promote productivity," and it noted that the Aadhaar system and demonetization helped to "reduce informality in the economy."

Nevertheless, Agarwal acknowledged that it could take some time for those in India's massive informal economy to adopt digitization.

"It will take some time because it is a material change in habits, material change of business model ... but I think over the next 12 to 18 months, by fiscal 2019 or early 2020, I think you'll start seeing those changes," he said.