India's economic growth looks like 2003-07, says Morgan Stanley

Riding on an investment boom, India's current economic growth, according to Morgan Stanley economists, echoes the world-beating growth phase from 2003 to 2007, when it averaged over 8 per cent. A report by the firm, titled 'The Viewpoint: India - Why this feels like 2003-07', points out resurgence in capex as a key driver in India's growth after a decade-long slide in the investment to GDP ratio.

The current expansion is characterized by investment outperformance instead of consumption, accelerated initial public capex, rapidly increasing private capex, leading urban consumer consumption, subsequent rural demand levels, growing global export market share, and well-controlled macro stability risks.

"We think the defining characteristic of the current expansion is the rise in the investment-to-GDP ratio. Similarly, in the 2003-07 cycle investment to GDP rose from 27 per cent in FY 2003 (fiscal year ending March 2003) to 39 per cent in FY 2008, which was close to the peak.

"Investment to GDP then hovered around those levels until it peaked in FY 2011. 2011 to 2021 then registered a decade of decline - but the ratio has now inflected again to 34 per cent of GDP and we expect it to rise further to 36 per cent of GDP in FY 2027," it said.

Investment in the current cycle is reflected in the rise of the investment-to-GDP ratio, similar to the 2003-07 period, where it climbed from 27 per cent in FY 2003 to 39 per cent in FY 2008. While this ratio continued to plateau thereafter until its peak in FY 2011, it declined for an ensuing decade. Presently, it stands at 34 per cent, with expectations of a rise to 36 per cent by FY 2027.

The previous capex boom precipitated productivity gains, job creation, and income growth in the period of 2003-07. Concurrently, savings, as a percentage of GDP, rose from 28 per cent in FY 2003 to 39 per cent in FY 2008. During this period, the GDP growth averaged 8.6 per cent, with CPI inflation averaging 4.8 per cent, and the current account balance remained within the central bank's comfort zone.

"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," it said.

In the present cycle, real Gross Fixed Capital Formation (GFCF) growth sustained well, recording 10.5 per cent in October-December, surpassing the pre-COVID 2017-18 average of 9.6 per cent. This growth is mainly attributed to public capex as the corporate sector recovers from previous shocks. However, private consumption remains relatively weak.

"A capex-led growth cycle can extend expansion, as rising investment to GDP ratios drive capital deepening and boost productivity growth. The deployment of surplus labor as capex creates employment opportunities can lead to higher income and savings in an economy and ensure the current account balance remains in a manageable range, even as investment to GDP rises," it said.

The report also highlights the recent policy focus on supply-side reforms by policymakers, which led to an uptick of government fixed capex from a low of 3.6 per cent in FY 2019 to 4 per cent in FY 2021. Morgan Stanley believes that the public capex-led growth in this cycle sets a solid foundation for the sustainability of the entire capex cycle.