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The US-Iran war in the Middle East could act as a catalyst for India’s next investment upcycle, with policymakers expected to respond through stronger capital expenditure and strategic diversification across key sectors, according to a report by Morgan Stanley.

The global brokerage said India’s policy focus is unlikely to be on eliminating external dependencies overnight, but the emphasis will be on reducing concentration risks, strengthening domestic buffers, and improving resilience to repeated global shocks.

Energy remains at the core of India’s policy response. The report highlighted a multi-layered approach that balances energy security with sustainability goals. Key measures include expanding the Strategic Petroleum Reserve (SPR), increasing coal gasification and domestic mining, accelerating electrification, and sustaining momentum in renewable energy.

Additionally, fast-tracking nuclear power projects is expected to become a priority as India looks to diversify its energy mix and reduce vulnerability to supply disruptions.

In the fertiliser sector, the report outlined a three-pronged medium-term strategy: diversifying import sources, expanding domestic production capacity, and improving nutrient efficiency through better agronomy practices.

This approach aims to mitigate supply risks while enhancing productivity and reducing dependence on volatile global markets.

The ongoing US-Iran war in the Middle East has reinforced the need for sustained higher defence spending, which Morgan Stanley strategists describe as a structural rather than cyclical shift.

India is expected to increase defence expenditure from around 2% of GDP currently to 2.5% by FY2031. This rise is likely to translate into stronger domestic manufacturing, deeper supply chains, and enhanced technological capabilities in the defence sector.

India could also emerge as a more attractive global destination for data centres, driven by geopolitical realignments and supply chain diversification, Morgan Stanley said.

Policy support and foreign investment inflows are expected to accelerate capacity creation in this segment, positioning India as a key digital infrastructure hub.

While Gulf-linked remittances — accounting for 38% of India’s total — face near-term risks from prolonged regional instability, the report noted that India’s external position is more resilient than before.

Diversification of remittance sources and the potential for reconstruction-led demand in the Middle East could help offset any temporary slowdown.

Reflecting these dynamics, Morgan Stanley has raised its investment rate forecast to 37.5% of GDP by FY2030, up from 36.5% earlier. This translates into incremental cumulative investments of about $800 billion over the next five years, with nearly 60% expected to flow into energy transition, data centres, and defence.

The report maintains a constructive outlook on India’s medium-term growth, projecting real GDP expansion of 6.5% – 7%.

A higher investment rate is expected to drive a stronger earnings cycle, with the profit share in GDP likely to exceed its previous peak of 7% and potentially move into the 8% range.

As a result, corporate earnings could grow at over 15% annually over the next five years, supporting a sustained bull market in equities.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.Ankit Gohel is the Deputy Chief Content Producer at Livemint, specialising in financial markets, macroeconomics, and regulatory developments. With a strong focus on equity markets, primary issuances, and policy-driven market movements, he brings clarity to complex financial developments for investors and market participants.

With nine years of experience in business and financial journalism, Ankit’s approach is rooted in the belief that market reporting should go beyond headlines — connecting data, policy, and ground realities to deliver actionable insights. His work consistently bridges the gap between institutional analysis and investor understanding.

Ankit has spent three years at Livemint, where he currently helps drive market coverage, editorial strategy, and high-impact financial stories. Prior to this, he worked with leading business news networks such as CNBC-TV18, ET Now, TickerPlant News Service where he built deep expertise in stock market analysis, macroeconomic trends, primary markets, and coverage of key regulators including the RBI and SEBI.

Over the years, he has covered market cycles across bull and bear phases, IPO booms, liquidity shocks, and major policy shifts that reshaped investor sentiment. He has interviewed fund managers, corporate leaders, and policymakers, translating their perspectives into sharp, data-backed narratives. Ankit combines speed with accuracy — ensuring timely, credible, and insight-driven financial journalism that empowers both retail and institutional audiences.

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