Morgan Stanley Sees India Poised for an ‘Upside Surprise’ as Earnings and Capex Accelerate

Morgan Stanley argues that India is being assessed using outdated emerging-market frameworks that equate strong growth with overheating risks. The report notes that India’s macro position today is structurally stronger than in previous cycles. Foreign exchange reserves stand at around $580–600 billion, covering over 10 months of imports, compared with less than 7 months during the 2013 taper-tantrum period. The current account deficit has remained largely contained below 2% of GDP in recent years, reducing external vulnerability.

Earnings Growth Can Outpace GDP for Years

A central argument of the report is that Indian corporate earnings can grow faster than nominal GDP for an extended period. India’s profit-to-GDP ratio is estimated at around 10–11%, still below the 14–15% levels seen at previous cycle peaks and well below several peer economies. This suggests room for earnings expansion without macro stress.

Morgan Stanley also highlights improving operating leverage. Capacity utilisation in manufacturing, which had languished near 65–70% for much of the last decade, has moved closer to 75–80% in several sectors. This shift allows incremental revenue growth to translate disproportionately into profits, supporting faster earnings growth without large new investments.

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A Government-Led Capex Cycle with Scale

The report stresses that the current capex cycle is materially different from earlier ones. Public sector capital expenditure has risen sharply, with central government capex increasing from around ₹3.4 lakh crore in FY20 to over ₹11 lakh crore in FY25, lifting public capex to roughly 4% of GDP. This compares with levels closer to 2–2.5% of GDP a decade ago.

Morgan Stanley argues that this sustained public investment in roads, railways, defence manufacturing, and energy infrastructure is improving logistics efficiency and lowering costs for the private sector. Gross fixed capital formation has risen to nearly 34% of GDP, indicating that the investment cycle is broadening rather than peaking.

Private Balance Sheets Are Healthier Than Past Cycles

Unlike previous investment booms, the current cycle is not fuelled by excessive private leverage. Corporate debt-to-equity ratios have fallen meaningfully from post-2011 peaks, while interest coverage ratios have improved. Non-performing assets in the banking system have declined to multi-year lows, with gross NPAs dropping from over 11% in 2018 to below 3% in recent data.

Morgan Stanley notes that this balance-sheet repair reduces the risk of a boom-bust cycle and allows private investment to return gradually rather than aggressively.

Formalisation Is Lifting Productivity and Margins

The report places strong emphasis on productivity gains from formalisation. GST collections, which averaged around ₹90,000 crore per month in FY18, now consistently exceed ₹1.6 lakh crore, reflecting a broader tax base and improved compliance. The number of registered taxpayers has expanded significantly, improving revenue visibility and pricing power for organised firms.

Digital infrastructure has also scaled rapidly. UPI transactions have crossed 10 billion per month, compared with negligible volumes a decade ago, lowering transaction costs and increasing efficiency across sectors. Morgan Stanley argues that these changes are structural and support sustained improvements in margins and return on equity.

Inflation and Fiscal Discipline Support Stability

India’s macro framework has strengthened meaningfully, according to the report. Consumer inflation, which peaked above 7% in 2022, has moderated closer to the RBI’s 4% target, with recent prints showing continued softness. Fiscal consolidation remains gradual but credible, with the fiscal deficit narrowing while protecting capital expenditure.

This combination, Morgan Stanley says, allows India to grow without sacrificing stability, a contrast to earlier periods when growth was accompanied by inflation spikes or external stress.

Valuations Reflect Quality

While Indian equities trade at a premium to peers, valuation concerns ignore earnings durability. The report notes that valuations look stretched only if earnings growth is assumed to mean-revert. If profits grow faster and for longer, as balance sheet repair and operating leverage suggest, current multiples may prove justified.

Global Investors Remain Under-Positioned

Despite strong market performance, India remains under-owned in global portfolios. Emerging market allocations are still skewed toward China and commodity-linked economies. Morgan Stanley believes that as earnings continue to surprise positively, global investors may be forced to raise India allocations, creating incremental upside.

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