Capex cycle in India has more room to grow, says Morgan Stanley

Capex has emerged as a key growth driver in India after a decade of steady decline in the invest to GDP ratio. The capex cycle has more room to run up, and the current expansion is reminiscent of the years 2003 to 2007, said Morgan Stanley in a research note.

The note highlighted that investment ratios are picking up after an 11-year decline and the runway for the current expansion cycle is long and constructive.

The five important characteristics of the current expansion cycle were that investment would outperform consumption, private capex is rapidly catch up with public spending, rural consumption would follow urban consumers, global exports will rise and risks to macro stability will be kept in check.


Detailing the similarities to the 2003-07 cycle, the research noted that the investment to GDP ratio rose to 39 per cent in FY2008 from 27 per cent in FY2003., hovered around those levels until it peaked in FY2011, after which there was a decline for the next 10 years. The ratio has is now 34 per cent of GDP and expected to rise to 36 per cent in FY27.

In the years 2003-07, there was a capex boom leading to acceleration in productivity, job creation, income growth and a rise in savings to GDP ratio. Economic growth averaged 8.6 per cent and headline consumer inflation was 4.8 per cent and the current account deficit was in a comfortable zone.

Capex cycle now

Investment growth has been strong in the current cycle with real gross fixed capital formation growth at 10.5 per cent in the fourth quarter of 2023. “This has been mainly driven by public capex so far, as the corporate sector has been working through multiple shocks from previous years that have weighed on its ability to invest.”

Now that corporate profit to GDP has picked up from a trough of 1.1 per cent in FY20 to 5.4 per cent in F23, there are early signs of private capex gaining momentum, it pointed out.

Policymakers have put a lot of focus on supply-side reforms and the public capex has pump primed the runway for private capex to take off “by eliminating supply-side bottlenecks ahead of time.”

With respect to consumption trends, the MS note said that successive shocks have delayed rural recovery and elevated levels of inflation have acted as a dampener. “We are now seeing signs that the rural household balance sheet is on the mend, and we expect further improvements, which bodes well for rural consumption.”

Supply chain effforts

As for goods market share, the research said that India will continue to benefit from supply chain diversification efforts internationally. “We have already seen India gaining market share in global FDI flows, alongside policy support to attract manufacturing and a steady stream of news indicating that multi-national companies are continuing their efforts to shift parts of their supply chains to India, especially in electronics manufacturing.”

Macro stability risks are less of a concern now than they were before chiefly due to the strong productivity and the central bank “playing an important role by leaning against the wind across the spectrum of its policy tools to prevent excesses from building up.”

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