Morgan Stanley Predicts Surge in India's Capital Expenditure Amid Middle East Crisis

Morgan Stanley Raises Forecast for India's Investment Rate Amid Global Uncertainty

Global investors remain on edge due to rising oil prices and the ongoing Middle East conflict, but Morgan Stanley is finding opportunities for growth in India. In its latest note, the brokerage has increased its forecast for India's investment-to-GDP ratio, expecting it to reach 37.5% by FY30, up from 36.5% earlier. This implies an additional $800 billion in cumulative capital spending over the next five years.

A significant portion of this fresh investment is likely to be directed towards energy, data centres, and defence, accounting for nearly 60% of the total. This upgrade is a positive sign for Indian equities, as higher capital expenditure should boost corporate profit share in GDP and support earnings growth of more than 15% compound annual growth rate (CAGR) over the next five years. Morgan Stanley believes that this could take the market towards 10 times FY31 earnings.

Policy Push Across Key Sectors

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The Middle East conflict has highlighted India's dependence on imports for energy and critical inputs. In response, policymakers are focusing on reducing risks and building domestic strength. Energy is a key area of focus, with India importing 85% of its crude oil and 50% of its natural gas. The strategy includes expanding strategic reserves, increasing domestic coal production and gasification, scaling up renewables with better grid support, and accelerating nuclear projects.

In addition to energy, the government is also addressing the country's dependence on imported fertilisers. The strategy includes boosting domestic urea capacity, diversifying import sources, and promoting efficient nutrient use to protect farmers and control fiscal costs. Defence spending is also shifting from cyclical to structural, with India aiming to raise defence outlays from around 2% to 2.5% of GDP by FY31.

The emphasis on indigenisation and private sector participation is already visible in recent defence orders. Furthermore, geopolitical uncertainty is driving growth in the data centre sector, with India's data localisation policies encouraging global players to diversify. Morgan Stanley expects data centre capacity to rise from 1.8 GW now to 10.5 GW by FY31.

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Constructive View on Growth and Markets

Morgan Stanley remains positive on India's medium-term trajectory, with real GDP growth anchored at 6.5-7%. The bigger investment push should create a virtuous cycle of higher capital formation and stronger corporate profitability. The report highlights companies well-positioned for these themes, maintaining Overweight ratings on names such as Adani Power, Adani Energy, Larsen & Toubro, BHEL, JSW Energy, CG Power, NTPC, Polycab India, KEI Industries, Reliance Industries, ONGC, Deepak Nitrite, HPCL, Solar Industries, Bharat Electronics, and Bharat Forge.

However, key challenges include crude price movements, fertiliser subsidy pressures, execution of defence orders, and power availability for new data centres.