Morgan Stanley likens economic boom of India to 2003-07 period

NEW DELHI: India’s current world-beating economic growth rate on the back of an investment boom resembles that of 2003-07 when growth averaged more than 8 per cent, according to economists at Morgan Stanley.

In a report ‘The Viewpoint: India - Why this feels like 2003-07’, Morgan Stanley said after a decade of investment to GDP steadily declining, capex has emerged as a key growth driver in India. ‘‘We think the capex cycle has more room to run, therefore the current expansion closely resembles that of 2003-07.

The current cycle is driven by investment outperforming consumption, public capex leading initially but private capex rapidly catching up, the urban consumer leading consumption followed by catch-up in rural demand, market share in global exports rising and macro stability risks kept in check.

‘‘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 F2003 (fiscal year ending March 2003) to 39 per cent 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 per cent of GDP and we expect it to rise further to 36 per cent of GDP in F2027E,’’ it said.

In 2003-07, the capex boom led to an acceleration in productivity, job creation and income growth. As more labour was absorbed into employment by the strengthening economy, savings to GDP also rose from 28 per cent in F2003 to 39 per cent in F2008. During 2003-07, GDP growth averaged 8.6 per cent and headline CPI inflation averaged 4.8 per cent. The current account balance stayed within the central bank’s comfort zone, ranging between 2.8 per cent to -1.4 per cent of GDP on a 4Q trailing sum basis.

On the flip side, private consumption is still relatively weak, tracking at just 3.5 per cent in the December quarter, below the pre-COVID 2017-18 average of 6.5 per cent