Will India’s fiscal deficit reach 4.2% of GDP for FY27 according to Morgan Stanley?
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Synopsis
Morgan Stanley forecasts that India's fiscal deficit will be set at 4.2% of GDP for FY27, a decrease from the previous target of 4.4%. This shift is expected to facilitate improvements in tax collection and capital expenditures, shaping the future economic landscape.
Key Takeaways
- Fiscal deficit set at 4.2% of GDP for FY27.
- Reduction from 4.4% in FY26.
- Debt expected to moderate to 55.1% of GDP.
- Focus on capital expenditure to stimulate job creation.
- Anticipated improvements in tax collections due to nominal growth.
New Delhi, Jan 16 (NationPress) The fiscal deficit of the central government is anticipated to be positioned at 4.2 percent of GDP for FY27 in the approaching Union Budget, a decrease from the 4.4 percent target set for FY26, according to a report from Morgan Stanley released on Friday.
This adjustment aligns with a reduction in debt to 55.1 percent of GDP, down from 56.1 percent in FY26.
“An increase in nominal growth is expected to enhance tax buoyancy, thereby improving collections in FY2027. This will enable the government to focus on capital expenditure and social infrastructure spending while gradually consolidating,” the report states.
The focus on capital expenditure is likely to foster job creation, targeted social sector investments, and an acceleration in the momentum of structural reforms, the report highlighted.
Historically, the market's response to the budget has been on a continuous decline, although actual performance is influenced by pre-budget expectations, as reflected by market movements prior to the budget announcement.
“Currently, the market seems to be approaching the budget with a degree of skepticism and may experience both volatility and potential upside risks post-budget, based on historical patterns,” the report indicated.
Key focus areas for the market include the level of fiscal consolidation, capital expenditure, and actions at the sectoral level.
“Capital market reforms aimed at rejuvenating foreign portfolio inflows will be of particular interest. We maintain a bullish stance on Financials, Consumer Discretionary, and Industrials sectors,” the report noted.
In line with ongoing fiscal consolidation, “we foresee net issuance of G-Secs to remain relatively stable at Rs 11.6 trillion (compared to Rs 11.5 trillion in FY26).”
“Gross issuance might rise to Rs 15.8 trillion (from INR 14.8 trillion in FY26) due to higher redemption amounts. Our issuance forecasts are on the conservative side of market expectations, which could temporarily boost G-secs if actualized, presenting an opportunity to secure favorable rates,” the report elaborated.
The global investment firm anticipates that domestic demand will drive GDP growth, despite ongoing global uncertainties related to tariffs and geopolitics impacting external demand.
“The persistent strength in high-frequency indicators observed in QE Dec-25 is promising, reaffirming that domestic demand is leading India's growth. Furthermore, the combined stimulus from fiscal and monetary policies, alongside improved purchasing power and labor market conditions, is expected to sustain the recovery in consumption,” it concluded.
Point of View
I find this report brings to light essential insights into India's fiscal policy. The focus on fiscal consolidation and targeted spending reflects a strategic approach to bolster economic resilience while addressing social infrastructure needs. It's crucial for our nation to navigate these fiscal challenges with an eye on sustainable growth.
NationPress
16/01/2026
Frequently Asked Questions
What is the projected fiscal deficit for FY27?
The projected fiscal deficit for FY27 is 4.2% of GDP, as reported by Morgan Stanley.
How does the FY27 target compare to FY26?
The FY27 target of 4.2% is a reduction from the 4.4% target set for FY26.
What factors are expected to improve tax collections?
A pickup in nominal growth is anticipated to enhance tax buoyancy and improve collections.
What is the expected impact on capital expenditure?
The focus on capital expenditure is likely to create jobs and drive targeted social investments.
What sectors are highlighted as promising for investment?
Morgan Stanley is optimistic about the Financials, Consumer Discretionary, and Industrials sectors.
