Investment rate in India poised to accelerate through 2026-27

The investment rate in India is expected to accelerate to 36.2 per cent of GDP by 2026-27 from 32.2 per cent of GDP in 2022-23, according to Morgan Stanley.

According to the multinational investment bank, the recovery in capital expenditure since the pandemic has been led by the government’s thrust for capital spending.

In the interim Budget tabled on February 1, the government proposed to increase capital expenditure outlay by 11.1 per cent to Rs 11.11 lakh crore in 2024-25.

A capital expenditure, or capex, is used to set up long-term physical or fixed assets.

Last year, which was the last full Budget under the Prime Minister Narendra Modi-led government’s second term, the government proposed to increase capital expenditure outlay by 33 per cent to Rs 10 lakh crore in 2023-24, which was estimated to be 3.3 per cent of the GDP.

Capital expenditure in private space, which has been on a weak footing for most of the last 10 years, is also showing signs of recovery as the government’s push for infrastructure spending is improving the business environment and crowding in private investments.

Private sector projects under implementation are growing at a robust 16.9 per cent as of December 2023 versus (-) 4.2 per cent pre-pandemic (December 2019), Morgan Stanley said.

Further, Morgan Stanley said new investment announcements made recently, like three semiconductor chip manufacturing plants entailing an investment of USD 15 billion and the newly approved EV policy that could trigger investments in the electric vehicle space, indicate nascent signs of pick up in corporate capex.

On March 13, Prime Minister Narendra Modi laid the foundation stones for the three semiconductor facilities with financial implications of about Rs 1.25 lakh crore - 2 in Gujarat and 1 in Assam. Tata Group is setting up two of these three plants - one in each of the states. The semiconductor industry in India is still in a nascent stage, with various local and multinational companies intending to tap its vast potential.

Tata Group hopes that the commercial production of semiconductors chips at the two plants - in Gujarat and Assam - whose foundation stones were laid recently, would start in 2026. Chip shortages during COVID-19 realised the importance of indigenous manufacturing to fill deficiency, for national security and galvanise indigenous innovation.

Coming back to the Morgan Stanley report, household capex, which accounts for approximately 37.6 per cent of total capex, has been recovering over the last 18-24 months with a turnaround in real estate sentiment in both the residential and commercial spaces.

All indicators currently favour a bull run in the Indian residential real estate market in election year 2024, and it is likely to repeat what it went through in 2014 and 2019, according to a recent report by real estate consultancy firm Anarock.

Morgan Stanley argued that the trend in exports tends to influence domestic production and capex cycles.

Morgan Stanley expects export market share (goods and services) will increase from 2.4 per cent currently to 4.5 per cent by 2031.