AI, Defence And Energy Transition Set To Drive India’s Next Capex Wave

India is poised for a fresh capital expenditure (CAPEX) expansion, driven by emerging sectors such as artificial intelligence (AI), defence modernisation, and the energy transition, according to Chetan Ahya, Chief Asia Economist at Morgan Stanley.

He pointed to improving trends in US industrial production and European industrial output, suggesting that the world may be entering a broader industrial revival, a trend now also reflected in India’s data.

This new wave of CAPEX will hopefully provide a boost to the economic growth of the country in the next few years and will enable it to maintain the productivity gains against the global industrial recovery.

What’s Supporting Capex Momentum?

Ahya points to a few clear signals that India’s capex cycle is picking up pace.

• Global industrial activity is starting to recover. That can improve demand for Indian exports.

• Export growth from India has been steady. At the same time, capacity utilisation across sectors is moving higher. This shows companies are using more of their existing production capacity.

• On top of that, the pipeline of domestic investment plans remains strong. This sets the base for sustained capital spending over the medium term.

Which Structural Trends Could Drive The Next Cycle?

Beyond exports, Ahya said the industrial upcycle is being reinforced by three long-term structural drivers:

1. AI Infrastructure Spending

He said economies are increasingly being forced to invest heavily in AI-linked infrastructure, which is becoming a major capex driver across regions.

2. Rising Defence Expenditure

Ahya noted that defence spending is rising across Asia, including countries such as Korea, Taiwan, and Japan, and India is also seeing the same push. He pointed out that India’s budget has increased defence spending allocation by 18%, which could further support industrial activity.

3. Energy Transition and Grid Expansion

He said the energy transition will also require substantial investment beyond renewable generation. He emphasised that large-scale solar expansion cannot function without upgrading the supporting power grid. He explained that the shift to solar and renewables is creating a new layer of “ancillary capex”, particularly in transmission and grid infrastructure.

Why Does The Macro Setup Look Supportive?

Ahya states that the macroeconomic structure is favourable since:

1. Inflation Likely To Stay Under Control

Inflation may not be a significant issue in the near future, since the base is quite low, and the labour market still possesses a lot of spare capacity. This minimises the chances of a sharp increase in inflation, even in the case of growth and capacity utilisation being enhanced.

2. No RBI Rate Hike Expected In 2026

Given the benign inflation outlook, Morgan Stanley does not expect the RBI to raise interest rates in calendar year 2026. Ahya said the first rate hike is expected only in 2027, creating a supportive environment where growth can remain strong while inflation gradually normalises.

3. Export Recovery May Trigger A Virtuous Capex Cycle

When exports start to pick up, this may widen a more corporate-capital spending rebound. An increase in exports would stimulate firms to increase capacity, further increasing industrial production and reinforcing the utilisation of capacity, which would initiate a virtuous cycle of industrial recovery in India.

4. Broader US Growth Could Add Another Tailwind

A stronger US growth outlook could provide additional support to Asia, including India. While India is less export-dependent than other Asian economies, exports remain a key contributor and could benefit from a broader global industrial upswing.

Why Is Investor Positioning An Important Signal?

Ahya pointed out that global investors are currently very cautious about India, which could create an opportunity if fundamentals improve.

He noted:

• Foreign investor positioning is at a 25-year low.

• Long-only investor positioning is at a 25-year low.

• Hedge fund positioning is at a 15-year low.

• India is among the most underweight emerging markets globally.

Given recent weakness in earnings and revenue growth, he said investor sentiment is currently bearish, but any improvement in corporate fundamentals could change that quickly. He believes India offers a differentiated opportunity over the next 12 months, especially if corporate revenue growth and gross domestic product (GDP) momentum show a clear turnaround.

What Does This Mean For Investors?

Morgan Stanley’s view suggests India could be entering a phase where global industrial recovery and domestic capex drivers align, supporting a stronger medium-term growth outlook.

For investors, the key monitorable should be whether export momentum and rising capacity utilisation translate into a sustained capex cycle. With global positioning in India at extremely low levels, even a modest improvement in earnings and revenue trends could trigger a sharper shift in sentiment and renewed foreign interest over the next year.

Sources

Economic Times

ET Now