How to keep China and India chugging along

Consumption and investment will reignite the cooling economies, respectively.

China has so far overloaded on investment support when what it needs now is to foster consumption growth, says Morgan Stanley in its latest Asia Pacific Economics research.

Meanwhile, India's predicament is the opposite. Its fiscal stimulus that has focused on strong rural consumption growth should be redirected more towards investment-friendly policy.

Here's more from Morgan Stanley:

Slowdown in growth helps to alleviate concerns over inflation and asset prices: Over the last few months, here have been clear signs of growth slowdown in the region, particularly in the domestic demand engine. This has reduced the macro stability risks, such as sustained rise in property prices and inflation pressures. Time for round II of aggressive tactical stimulus? Investors are starting to look for revival in growth from yet another tactical policy response of monetary easing and/or expansionary fiscal policy. We believe any aggressive stimulus effort would only revive the macro stability risks all over again. We expect only a gradual and limited tactical easing.

What is the more sustainable recovery path? We would feel more excited about the prospects of revival in growth on a sustainable basis in the region, particularly China and India, if policy makers were to initiate a systematic, determined and aggressive effort to revive domestic demand with the support of strategic measures to bring the productivity dynamic back.

China needs consumption, India needs investment: Macro dynamics in both economies warrant that they seek a sustainable source for a domestic demand engine of growth for their respective economies. We believe China should tilt the balance towards boosting consumption growth while India needs to lift investment.

Macro imperatives forcing the right noises from policy makers: However, the pace of execution remains slow. We see higher chances of China lifting the pace of execution by mid-2012. In India, we believe the pace of execution will pick up in 2Q2012 – but considering the current political environment, it may be a while before the cumulative policy reform actions bring about a robust investment recovery.