India's economic boom resembles 2003-07: Morgan Stanley

Economists at Morgan Stanley believe the current expansion in the Indian economy resembles the booming 2003-07 period when GDP (gross domestic product) growth averaged 8.6%.

After a decade of investment to GDP steadily declining, capex has emerged as a key growth driver in India, the brokerage says in a research note. "We think the capex cycle has more room to run, therefore the current expansion closely resembles that of 2003-07."

According to Morgan Stanley, the defining characteristic of the current expansion is the rise in the investment-to-GDP ratio. "In the 2003-07 cycle investment to GDP rose from 27% in F2003 (fiscal year ending March 2003) to 39% in F2008, which was close to the peak. Investment to GDP then hovered around those levels until it peaked in F2011. 2011 to 2021 then registered a decade of decline - but the ratio has now inflected again to 34% of GDP and we expect it to rise further to 36% of GDP in F2027E," the report titled 'The Viewpoint: India - Why this feels like 2003-07' says.

India's GDP grew 8.4% in the December quarter, higher than the Reserve Bank of India (RBI) monetary policy committee's forecast of 6.5%.

In 2003-07, investment grew faster than consumption and the capex boom led to an acceleration in productivity, job creation and income growth. Gross fixed capital formation (GFCF) growth in India accelerated sharply from 8.2% in 2002 to 17.5% in 2004, and the pace of growth held firm at 16.2% in 2005-07.

"In that cycle, the fiscal deficit was already consolidated, the banking system's non-performing loan issues were cleaned up and the economy was poised for a capex upswing. However, the initial pick-up in private consumption growth was more modest, averaging just 4.8%Y in 2003-04 (vs. 2.8%Y in 2002). The sustained capex cycle drove stronger employment and income growth, which led to a more marked acceleration in private consumption to an average of 8.3%Y in 2005-07," says Morgan Stanley.

This cycle too, investment growth has been stronger: Real GFCF growth continued to hold strong at 10.5%Y in 4Q23, staying above the pre-Covid 2017-18 average of 9.6%. 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.

"However, now that corporate profit (based on bottom-up company data) to GDP has picked up from a trough of 1.1% in F2020 to 5.4% in F2023, we are now seeing early signs of private capex gaining momentum. On the flip side, private consumption is still relatively weak, tracking at just 3.5%Y in 4Q23, below the pre-Covid 2017-18 average of 6.5%Y," the research note says.

Government fixed capex as a % of GDP rose from a trough of 3.6% in F2019 to 4.0% in F2021, again picking up ahead of private capex. In contrast, private capex rather than public capex drove the broader capex cycle in 2003-07, as favorable external demand conditions provided a strong uplift to private capex. However, the lagged increase in public capex to GDP meant infrastructure remained a key constraint for growth, says Morgan Stanley.