In a significant projection, economists at Morgan Stanley foresee investments in India outpacing consumption over the coming years, with Gross Fixed Capital Formation (GFCF) expected to surge to 36 percent of GDP by 2026-27.
According to a recent report by Morgan Stanley, real GFCF growth remained robust at 10.5 percent in the fourth quarter of 2023, surpassing pre-Covid levels. Conversely, private consumption growth has been relatively subdued, registering just 3.5 percent in the same period, below the pre-pandemic average.
Despite India’s headline GDP growth exceeding expectations, concerns linger regarding the sluggish pace of consumption demand. While GDP is projected to expand by 7.6 percent in the fiscal year 2023-24, Private Final Consumption Expenditure (PFCE) is estimated to grow at a mere 3.0 percent, reflecting a significant slowdown from previous years.
In contrast, GFCF, viewed as a barometer for investments, is poised for a robust growth trajectory, expected to record a growth rate of 10.2 percent in 2023-24. This trend signals a shift towards investment-led growth, with GFCF projected to rise to 34.1 percent of GDP in the current fiscal year and further to 36 percent by 2026-27.
Morgan Stanley draws parallels between the current investment-driven growth phase and India’s mid-2000s boom period. During that period, accelerated GFCF growth catalyzed stronger employment and income growth, subsequently driving up private consumption levels.
While rural consumption faced challenges amid the COVID-19 pandemic and inflationary pressures, recent indicators suggest a gradual recovery. Rural fast-moving consumer goods sales witnessed an uptick to 5.8 percent in the fourth quarter of 2023, signaling a narrowing gap between urban and rural consumption growth rates.
Despite initial setbacks, Morgan Stanley remains optimistic about the rural sector’s resilience, anticipating further improvements in rural consumption as economic conditions stabilize.
