August 14, 2025
Rising manufacturing activity and a higher credit-to-GDP ratio indicate a more resilient and diversified economy
Falling oil dependence and stronger exports, especially in services, are improving India’s external position.
Fiscal consolidation could bring a primary surplus within three years, helping to lower real interest rates
A stable, low-volatility growth environment is likely to shift household savings further into equities
India is on track to become the world’s most sought-after consumer market, according to a new Morgan Stanley report, despite global uncertainty triggered by the Trump tariff blitz and concerns over slowing GDP growth. The research points to structural economic changes, an accelerating energy transition, and expanding manufacturing activity as the main drivers.
The report outlines how macroeconomic stability, fiscal discipline, and policy reforms are shaping the foundations for sustained growth and increased investment inflows. It notes a rising credit-to-GDP ratio and a growing manufacturing share of GDP, both seen as signs of a more diversified and resilient economic base. The country’s falling oil intensity, alongside a higher proportion of exports—particularly in services—signals a strengthening external position.
Morgan Stanley projects that India could achieve fiscal consolidation with a primary surplus within the next three years. This would help reduce the saving-investment gap, paving the way for structurally lower real interest rates. Inflation volatility is expected to fall further, driven by supply-side improvements and flexible inflation targeting, which would stabilise both interest rates and growth.
From an investment perspective, the combination of high growth, low volatility, and declining interest rates is expected to support higher price-to-earnings (P/E) ratios. This could encourage a structural shift in household balance sheets towards equities, a trend already visible in sustained retail participation in the stock market. The “low beta” environment, anchored by improved macroeconomic stability and greater household portfolio diversification, adds to India’s appeal. The report also notes that equity market performance may be understating how far stocks have de-rated compared to long bonds and gold, even as India’s share of global GDP increases.
On the earnings front, the slowdown that began in the second quarter of FY2025 appears to be ending. While the market remains cautious, a supportive stance from the Reserve Bank of India is contributing to a recovery.
Morgan Stanley highlights several potential triggers for improved sentiment: finalising a trade agreement with the United States, fresh capital expenditure commitments, faster loan growth, already evident in the corporate bond market, uniform improvement in high-frequency indicators, and deeper trade links with China.
The report concludes that India’s blend of robust domestic demand, growing industrial capacity, macroeconomic stability, and favourable demographics could make it one of the most attractive global investment destinations. If these elements align, the country could enter a prolonged phase of high growth with reduced economic volatility, drawing unprecedented levels of interest from both domestic and international investors.
Source: Financial Express