Morgan Stanley: Budget Math is Plausible, Economic Growth Set to Accelerate
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Synopsis
The Union Budget has successfully met its objectives, enhancing consumption through tax cuts and strengthening capex through state transfers, while maintaining fiscal consolidation. This is expected to spur economic growth and ensure macro stability, according to a recent Morgan Stanley report.
Key Takeaways
- Tax Cuts to enhance consumption.
- Capital Expenditure boosted via state transfers.
- Fiscal consolidation maintained with a target of 4.4% fiscal deficit.
- Nominal GDP projected at 10.1% for F2026.
- New tax code expected to create a more liberal environment.
New Delhi, Feb 3 (NationPress) The Union Budget has successfully achieved the objectives of enhancing consumption through tax reductions, boosting capital expenditure via transfers to states, and adhering to a course of fiscal consolidation. This is projected to foster a revival in the economic growth rate while maintaining macro stability at a manageable level, according to a report from Morgan Stanley released on Monday.
The report indicated that both fiscal and monetary policies are adjusting to encourage growth, aligning with "our perspective on a cyclical recovery in growth".
"The Budget math appears plausible, with nominal GDP predicted at 10.1 percent for F2026 and a gross tax revenue increase of 10.8 percent. We will keep a close eye on income tax collection growth, which the government anticipates to be 14.4 percent, considering the income tax reductions and implementation of capex spending to achieve the targets," the report detailed.
It highlighted that the Budget has effectively balanced the need to stimulate growth while continuing with fiscal consolidation. Consequently, the Budget sets a lower fiscal deficit of 4.4 percent of GDP for F2026, even as it has lowered income taxes to boost consumption, particularly for middle-income taxpayers, and has enhanced capex growth mainly through increased grants to states for capital asset creation.
“Indeed, as stated by the Finance Minister, changes in direct taxes are expected to result in a 1.0 percent revenue loss of Rs 1 lakh crore (0.3 percent of GDP), which should assist in promoting consumption,” the Morgan Stanley report noted.
In terms of expenditure, the focus remains on capex, with effective capex (direct capex plus grants for capital asset creation) expected to grow by 17.4 percent in F2026BE as opposed to 5.3 percent in F2025RE.
“We anticipate the Budget will bolster growth recovery through initiatives aimed at enhancing consumption and increasing effective capex expenditure, likely resulting in a more widespread recovery, while ongoing consolidation should help maintain macro stability,” the report remarked.
The simultaneous enhancement of consumption and capex is expected to be favorable for equities, especially in light of ongoing and better-than-expected fiscal consolidation (projected primary deficit: 0.8 percent).
The numerous announcements regarding the relaxation of India's tax framework, including adjustments to permanent establishment rules, clarifications for GIFT city, extensions of exemptions for sovereign funds, and modifications to tax deduction and collection at source, could enhance foreign direct investment (FDI) and private investment sentiment, according to the report.
“A new tax code is set to be introduced this week as outlined in the Budget, which may unveil a more progressive tax environment. We are optimistic about sectors such as Financials, Consumer Discretionary, Industrials, and Technology, while being cautious about other sectors,” the report added.
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