Mumbai: India’s equity market capitalisation would grow at a compound annual rate of 12 per cent to reach USD 6 trillion by 2028. Equities could also prove to be the asset class that gives the best return going forward but with lower returns than in the past 25 years, says a Morgan Stanley report.

India analysts of the US investment banking firm also expects the Indian economy to grow to $6 trillion size in the next 10 years.

In a report titled, “25 Years: Retrospective and Prospective”—brought out to mark completion of its 25 years in India--Morgan Stanley India analysts say the journey toward a $6 trillion GDP and market cap is, however, not without its challenges and risks.

 “We see risks to our base case from global growth environment and delivery and execution of policy reforms required to support the medium-term growth trajectory,” Ridham Desai, Sheela Rathi and Upasana Chachra, analysts from Morgan Stanley said.

“India’s medium-term growth trend will be supported by the interplay of the structurally positive factors of demographics (strong growth in the working age population), reforms (including recent changes to tax laws and India's digitization drive that can help improve productivity) and globalisation (accelerating productive job opportunities, income and saving),” the report said.

“We expect GDP growth to average around 7 per cent over the next 10 years with investment, exports and consumption contributing to the growth. We expect India to be one of the high growth economies among large countries over the medium term. If our growth projections were to come to fruition, India’s economy would pass the $6 trillion mark over the next 10 years, with per capita income at $4,100 – reaching the upper middle income country threshold.”

“We also expect corporate earnings to grow accordingly from very depressed levels, as evident in the profit share in GDP. Thus, it is quite possible that stocks will be the best-returning asset class in the country – albeit with lower returns than in the past 25 years. We expect equity market capitalisation to compound at 12 per cent to $6 trillion by 2028.”

The equity market capitalisation has increased by over 14 per cent annually to $2 trillion in the last 25 years.

The macro environment, the report says, is not stretched as in 2013. But there are pressures from rising oil prices and a depreciating currency, but given the India's macro balance sheet, these are not difficult to handle. Real rates are positive, the current account deficit is range-bound at around 2.5 per cent of GDP, the fiscal deficit is controlled, and inflation is benign. Corporate balance sheets are healing.

India's GDP is up 10-fold and equity market cap is up 22 times in the last 25 years. The period has seen its share of cycles, the report said.