Morgan Stanley sees Budget 2026-27 balancing fiscal consolidation with growth support
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Morgan Stanley has released its analysis of India’s Fiscal Year 2027 budget, characterising it as a balance between gradual debt reduction and sustained economic support through both cyclical and structural measures. The firm remains constructive on Indian equities, maintaining an Overweight stance on Financials, Consumer Discretionary, and Industrials.
The budget targets a fiscal deficit of 4.3% of GDP, aligning with a central government debt-to-GDP ratio of 55.6% by F27.
According to the report, “The Budget maintains the fiscal consolidation path, albeit at the shallowest pace since the pandemic.” It supports growth through three key channels: a continued push for manufacturing—including semiconductors and rare earth magnets—a focus on services sector exports, and renewed capital expenditure impetus, with total capex rising 11.5% year-on-year.
The analysis highlights a strategic shift in policy focus. “The budget speech almost begins with the word 'semiconductors,' which signals a major pivot in the government's view of what India should pursue,” the report notes. This, combined with capex growth and measures to boost services, is expected to support corporate earnings.
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Morgan Stanley expects the budget to “support cyclical growth recovery through its emphasis on capex” while simultaneously strengthening India's “structural growth trend through steps that improve manufacturing competitiveness and services sector attractiveness.”
With nominal GDP growth assumed at 10% for F27, the firm views the fiscal math as realistic. The overall assessment underscores a measured approach to fiscal consolidation while prioritizing investments aimed at sustaining India’s long-term growth trajectory.
Finance Minister Nirmala Sitharaman on Sunday presented her ninth Budget in Parliament for 2026-27. She announced a 9% rise in capital spending, taking it to ₹12.2 lakh crore. Railways got a big boost with ₹2.78 lakh crore allocated, including plans for seven new high-speed rail corridors across the country. Highways also saw an increase of 8% with ₹3.09 lakh crore set aside. The tax system remains unchanged, and the Centre will give ₹1.4 lakh crore to states as part of tax devolution next year.