India is on the cusp of a virtuous cycle, says Morgan Stanley

 Increasing capex ratios in India will lift employment prospects, boosting income and consumption growth to create a virtuous cycle, broking firm Morgan Stanley said. India’s capex to gross domestic product (GDP) ratio is expected to rise by six percentage points between FY21 and FY26, it said in a report.

“A virtuous cycle, supported by strong capex and productivity, is taking off in India. Strong rates of growth, coupled with benign macro stability risks, set a positive backdrop for the ratio of corporate profits to GDP to rise. This cycle will be unlike the past decade and more like 2003-07," said the report dated 19 October. The broking firm expects India GDP growth to average 7% in FY23-26. It sees India entering a new profit cycle, which may result in earnings compounding at 20-25% per annum for the next four years. According to Morgan Stanley, the India story stands out now, not only from an absolute perspective, but also from a relative perspective, because of this rise in the ratio of corporate profit to GDP.

“With nascent signs of capex, supportive government policy for higher corporate profit share in GDP and a robust global growth outlook, India seems well placed to enter a new profit cycle. For an economy that is likely to grow at a nominal rate of 10-12% per annum, if the profit share in GDP hits 3.5% over the next five years, it gives us an annual compounded growth in earnings of 25% for the broad market," it said.

Morgan Stanley thinks that India’s economy is well-positioned and ready for a takeoff in this cycle, given the global macro backdrop as well as supportive policy reforms.

India’s growth momentum is just gathering pace again after the easing of restrictions from mid-June. High-frequency indicators are indicating a robust recovery, with all components reaccelerating in tandem.

In the September 2021 quarter, Morgan Stanley expect GDP growth to accelerate to 18.8%. From there, growth momentum will pick up, lifting India’s GDP to almost 6% above its pre-covid path by end-2022, it added.