According to a report by Morgan Stanley released on Monday, India's Union Budget for FY2026 has successfully met its key objectives, namely boosting consumption through tax cuts, increasing capital expenditure (capex) by transferring funds to states, and maintaining fiscal consolidation.
These efforts are expected to drive a recovery in economic growth while keeping macroeconomic stability in a favorable range.
The report highlights that both fiscal and monetary policies are aligned to support economic growth, confirming Morgan Stanley's view of a cyclical recovery. The budget's assumptions, including a nominal GDP growth of 10.1% and a 10.8% increase in gross tax revenue, appear realistic. However, the report notes caution on income tax collection growth, with the government forecasting a 14.4% increase due to tax cuts and capex spending.
The Budget has balanced growth support with fiscal discipline, targeting a fiscal deficit of 4.4% of GDP for FY2026, despite tax cuts aimed at stimulating consumption, particularly for middle-income earners. The Finance Minister’s move to reduce income taxes is expected to result in a revenue loss of around Rs 1 lakh crore (0.3% of GDP), which should help stimulate consumption.
On the expenditure side, the Budget focuses heavily on capex, with effective capex (direct capex plus grants for creating capital assets) projected to grow by 17.4% in FY2026 compared to 5.3% in FY2025. This focus on consumption and capex is expected to drive broad-based recovery and help maintain macro stability.
Morgan Stanley also notes that the concurrent rise in consumption and capex could be highly favorable for equities, particularly in light of better-than-expected fiscal consolidation, with a projected primary deficit of 0.8%.
The report also points out various tax relief measures, including updates on permanent establishment rules, clarifications for GIFT city, extensions of exemptions for sovereign funds, and changes to tax deduction and collection at source. These measures are likely to boost foreign direct investment (FDI) and private investment sentiment.
The upcoming new tax code under the Budget is also anticipated to provide easier taxation procedures. Morgan Stanley remains "overweight" on sectors like Financials, Consumer Discretionary, Industrials, and Technology, while maintaining an "underweight" stance on other areas.
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