In a report titled Opportunities and Risks amid Conflict, Morgan Stanley India Economics & Strategy said: “The Middle East conflict is likely to see a renewed surge in investment activity in different sectors – defence, data centres, energy diversification and efforts to secure supply chains.”
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The note argues that India’s policy response is increasingly centred on reducing external vulnerabilities by strengthening domestic manufacturing and attracting foreign capital into strategic sectors, particularly digital infrastructure.
“We expect policy responses to prioritize domestic manufacturing in defence/fertilisers, support new energy investments and look to attract foreign investment in data centres.”
It adds that the investment rate forecast has been revised upward:
“As such, we raise our investment rate forecast to 37.5% of GDP in F2030 (36.5% previously), with incremental cumulative investments worth US $800bn over the next five years.”Also Read: Current growth trajectory paves way for India to be a developed nation by 2047: Jeffrey D Sachs
Around 60% of this projected capital expenditure is expected to flow into energy transition, data centres, and defence, signalling a shift toward infrastructure-heavy growth.
Despite global volatility, India’s medium-term growth outlook remains steady, with real GDP expected to hold in the 6.5–7% range.
The report also links higher investment intensity with stronger equity market outcomes. It argues that a sustained capex cycle could lift corporate profitability and valuations over time.
“More Capex => Bull Market: A higher peak investment rate implies a stronger earnings outlook. Profit share in GDP would exceed its previous peak of 7% and could head into the 8s. This means earnings could compound at >15% in the next five years, putting the overall equity market at c.10x F2031e.”
At the core of the analysis is a shift in policy thinking—from self-sufficiency to resilience.
“We believe the central policy challenge is not to eliminate India’s external dependence overnight, but to reduce concentration risk, strengthen domestic buffers and improve resilience to repeated shocks.”
Five channels reshaping capital flows
The report highlights that geopolitical tensions are now actively influencing capital allocation into India through five key channels: energy, fertilisers, defence, data centres, and remittances.
Energy
Energy remains the most exposed channel due to India’s reliance on imported crude and gas. The response is increasingly multi-pronged:
“A multi-pronged strategy to balance energy security, economic needs, and sustainability through: (i) expansion and use of the Strategic Petroleum Reserve (SPR), (ii) more emphasis on coal gasification and coal mining, (iii) greater electrification, (iv) continued focus on renewable energy; and (v) fast-tracking nuclear power projects.”
While hydrocarbons continue to dominate near-term consumption, coal is being positioned as a domestic stabiliser, renewables as a long-term hedge, and nuclear as a steady baseload source.
Fertilisers
India’s fertiliser sector remains heavily import-dependent due to limited domestic availability of key inputs like phosphates and potash. The focus is on managing exposure rather than full self-sufficiency:
“The medium-term response involves a three-part strategy: diversify supply sources, expand domestic capacity, and reduce nutrient intensity via better agronomy and input efficiency.”
Defence is increasingly being seen as a structural investment theme rather than a cyclical budget item. The emphasis is shifting toward domestic production, technology development, and supply-chain depth. Defence spending is also expected to rise from about 2% of GDP to 2.5% by FY2031.
“The conflict reinforces that higher defence spending is no longer cyclical but structural, and this should translate into domestic production, technological capability and supply-chain depth.”
Data centres are emerging as a major structural investment theme, supported by both geopolitics and domestic policy.
“Geopolitical de-risking, together with India’s domestic policy push (data localisation, infrastructure status and state-level incentives), is reinforcing a multi-year investment cycle in data centres,” the report said.
This expansion is expected to lift power demand and industrial activity, making it one of the most capital-intensive growth drivers over the medium term, closely tied to electricity availability and cost.
Remittances continue to support India’s external account, though their composition is gradually diversifying away from Gulf economies toward advanced markets. The Gulf still remains a key anchor:
“Remittances: Gulf-linked remittances remain a key support for India’s external account, making up 38% of overall remittances.”
Near-term volatility remains a risk, but diversification in migration patterns and potential reconstruction-linked flows could provide partial offsets.
Macro outlook
Overall, policy direction is expected to remain focused on domestic capacity building across energy, defence, and digital infrastructure, driving an investment-heavy growth phase.
“Macro implications – boost to capex: The policy response is likely to remain oriented towards domestic capacity creation across energy, defense and digital infrastructure, implying an investment-led impulse that is supportive for medium-term growth.”
India’s investment rate is projected to peak at 37.5% of GDP by FY2031, with total investment rising to about $2.2 trillion. The current account deficit is expected to average around 1.5% of GDP over the next five years, largely driven by oil and fertiliser import costs.