In a recent report titled 'The Viewpoint: India - Why this feels like 2003-07', global financial services firm Morgan Stanley highlighted striking parallels between India's current economic trajectory and the prosperous growth period of 2003-07.
According to the report, India's economic growth rate is reminiscent of the earlier era when it averaged more than 8 percent.
Morgan Stanley pointed out that after a decade of sluggish investment-to-GDP ratios, a significant resurgence in capital expenditure (capex) is emerging as a pivotal driver of growth in India. The report emphasized that the ongoing capex cycle bears resemblance to the period of 2003-07, characterized by a robust expansion.
"The capex cycle has more room to run, therefore the current expansion closely resembles that of 2003-07," stated Morgan Stanley. The analysis indicated that the current cycle is propelled by investment outpacing consumption, with public capex leading initially but private capex rapidly catching up.
"We think the defining characteristic of the current expansion is the rise in the investment-to-GDP ratio," Morgan Stanley asserted. The investment-to-GDP ratio, which had seen a decline from 2011 to 2021, has now shown signs of resurgence, climbing to 34 percent of GDP, and is expected to further rise to 36 percent of GDP by the fiscal year 2027.
The report also highlighted that the initial surge in private consumption growth during the 2003-04 period was relatively modest, averaging just 4.8 percent. Despite this, real Gross Fixed Capital Formation (GFCF) growth has remained robust, clocking in at 10.5 percent in the October-December period, exceeding the pre-Covid 2017-18 average of 9.6 percent.
Morgan Stanley attributed this sustained growth in GFCF primarily to public capex, as the corporate sector navigated through various shocks from preceding years that hampered its investment capabilities.
Yet, the report noted a promising shift, with corporate profits (based on bottom-up company data) to GDP rising from a trough of 1.1 percent in fiscal year 2020 to 5.4 percent in fiscal year 2023. These early indicators suggest a resurgence in private capex, signifying a broader economic revival.
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