Morgan Stanley’s chief Asia economist has expressed reservations regarding India’s ability to match China’s remarkable 8%-10% economic growth rates over the long term, despite maintaining optimism about India’s prospects.
In an interview with Bloomberg Television, Chetan Ahya indicated that India’s economy is expected to sustain a steady growth rate of 6.5%-7% over the long term. He emphasized that India still lags behind China in becoming a global manufacturing powerhouse, noting China’s sustained average annual growth rate of 10% over three decades following its economic reforms in 1978.
Ahya highlighted challenges faced by India’s economic progress, including insufficient infrastructure and a shortage of skilled labor. He noted, “Both these constraints make us believe that India’s growth is going to be strong, but at 6.5%-7% rather than 8%-10%.”
In another report, Morgan Stanley pointed out that India’s current economic growth, fueled by increased investments, resembles the period of 2003-07, during which growth averaged more than 8 percent.
In their report titled ‘The Viewpoint: India – Why this feels like 2003-07’, Morgan Stanley highlighted that capital expenditure (capex) has emerged as a significant driver of growth in India after a decade of declining investment to GDP ratios. They stated, “We think the capex cycle has more room to run, therefore the current expansion closely resembles that of 2003-07.” The current cycle is characterized by investment outpacing consumption, with public capex initially leading but private capex quickly catching up. Additionally, urban consumers are driving consumption, followed by increased demand in rural areas. Moreover, India’s market share in global exports is rising, and macro stability risks are being effectively managed.
The report also emphasized the rise in the investment-to-GDP ratio as a defining characteristic of the current expansion. In the 2003-07 cycle, investment to GDP rose from 27 percent in F2003 to 39 percent in F2008, nearing its peak. Investment to GDP then remained around those levels until it reached its zenith in F2011. However, from 2011 to 2021, there was a decade-long decline in the ratio. Presently, the ratio has begun to rebound, reaching 34 percent of GDP, with expectations for further growth to 36 percent of GDP by F2027E.