Morgan Stanley Positively Surprised by Interim Budget's Fiscal Deficit Target

The Interim Budget has strategically focused on consolidating the fiscal deficit, surpassing initial expectations, and setting a target of 5.1 per cent of GDP for the fiscal year 2025 Budget Estimate (F25BE). This represents a notable reduction from the fiscal deficit of 5.8 per cent of GDP in the fiscal year 2024 Revised Estimate (F24RE). A recent report from foreign brokerage Morgan Stanley (NYSE:MS) commends the fiscal assumptions as reasonable, with slightly conservative tax revenue projections.

The Budget has demonstrated a commitment to macroeconomic stability by achieving a lower-than-anticipated fiscal deficit and government borrowing. This approach is expected to create room for the private sector to drive capital expenditure (capex) growth. The report suggests that the moderation in total expenditure growth to 6.1 per cent in F25BE, down from 7.1 per cent in F24RE, is primarily attributed to a slowdown in overall capex, stemming from a high base, and subdued growth in revenue spending.

Although capex spending continues to outpace revenue spending, the Budget forecasts a deceleration in infra-related capex spending to 5 per cent Year-on-Year in the fiscal year 2025 Budget Estimate (F2025BE), compared to the robust 19 per cent in the fiscal year 2024 Revised Estimate (F2024RE).

Morgan Stanley observes that the government seems to be steering the economy towards a transition from government expenditure to private expenditure-led growth. However, a more comprehensive confirmation of this economic shift is anticipated with the release of the full Budget in July, post-elections.

The report highlights the positive impact of higher-than-expected fiscal consolidation on macro stability, acknowledging it as good news. While it may exert a slight drag on earnings, the anticipated reduction in long-term yields is viewed favorably for equities. The lower government borrowing for the remainder of the current fiscal year and the next is deemed beneficial for liquidity and private sector banks. Consequently, the report recommends an overweight position in the financial sector.

In summary, the Interim Budget's emphasis on fiscal consolidation, macroeconomic stability, and the potential shift towards private sector-driven growth is seen as a positive step. Investors are urged to monitor the forthcoming full Budget in July for further confirmation and detailed insights into the government's economic strategy.

(With Agency Inputs)