Mumbai, Oct 20 (IANS): A virtuous cycle, supported by strong capex and productivity, is taking off in India, a Morgan Stanley research report said on Wednesday.

Strong rates of growth, coupled with benign macro stability risks, set a positive backdrop for the ratio of corporate profits to GDP to rise. This cycle will be unlike the past decade and more like 2003-07, the report said.

It said that for India, capex and productivity growth will take the lead as key drivers of growth in the current cycle, just as they did in 2003-07. This will allow strong rates of growth while keeping the macro stability risks at bay.

What is working for India this time around is that policymakers are making concerted efforts to improve the business environment, incentivise corporate activity, and attract manufacturing investment.

Led by manufacturing, capex to GDP ratios are rising 6 percentage points (ppt) from FY21 to FY26, the report said.

"This is a clear inflection in India's macro environment. Rising capex ratios will significantly lift employment prospects and boost income and consumption growth, creating a virtuous cycle. The effective utilisation of both factors of production will unlock India's structural positives, allowing it to generate robust economic and corporate profit growth," the report said.

Morgan Stanley now expects India's GDP growth to average 7 per cent in FY23-26. Also, India would enter a new profit cycle, which may result in earnings compounding at 20-25 per cent per annum for the next four years.

"We think that India's economy is well-positioned and ready for a takeoff in this cycle, given the global macro backdrop as well as supportive policy reforms," the report said.

However, the risks to this positive sentiment remains, but more from external factors than domestic and cyclical rather than structural in nature. For instance, a sharper rise in US core inflation above 2.5 per cent per annum, driven by wage growth, could lead to a disruptive pace of Fed rate hikes and in turn spillover to a tightening of financial conditions in India.