Union Budget’s Realistic Approach to Economic Recovery

The report released by Morgan Stanley lauds the Union Budget’s approach to economic recovery for its realistic projections and strategic measures. The budget has successfully met its objectives of stimulating consumption through tax cuts, increasing capital expenditure (capex) via state transfers, and maintaining fiscal consolidation. These measures are expected to accelerate economic growth while ensuring macroeconomic stability. The report underscores the pivot of both fiscal and monetary policies towards supporting growth, aligning with Morgan Stanley’s anticipation of a cyclical recovery in growth.

The budget’s calculations are deemed realistic, with nominal GDP projected at 10.1% for the fiscal year 2026 and gross tax revenue growth at 10.8%. However, the report also highlights the need for vigilance regarding income tax collection growth, which the government expects to be 14.4%. This expectation comes in the wake of income tax cuts and the execution of capex spending to meet targets.

The budget has managed to strike a balance between supporting growth and continuing fiscal consolidation. It targets a lower fiscal deficit of 4.4% of GDP for the fiscal year 2026, even as it reduces income taxes to boost consumption, particularly for middle-income taxpayers. It also plans to expand capex growth, primarily through an increase in grants to states for capex creation.

According to the Finance Minister, the changes in direct tax should result in a revenue loss of Rs 1 lakh crore (0.3% of GDP), which is expected to stimulate consumption. The report by Morgan Stanley supports this view. On the expenditure front, the budget continues to lean towards capex. Effective capex, which includes direct capex and grants in aid of creating capital assets, is projected to grow at 17.4% in the fiscal year 2026, compared to 5.3% in the fiscal year 2025.

The report anticipates that the budget will aid growth recovery through measures promoting consumption and increasing effective capex spending. This is likely to result in a more broad-based recovery, while continued consolidation should help maintain macro stability. The simultaneous boost to consumption and capex is expected to be beneficial for equities, especially in the context of ongoing and better-than-expected fiscal consolidation. The projected primary deficit stands at 0.8%.

The report also highlights several announcements aimed at easing India’s tax regime. These include clarifications on permanent establishment rules, GIFT city, extensions of exemptions to sovereign funds, and changes to tax deduction and collection at source. These measures could potentially enhance foreign direct investment (FDI) and private investment sentiment. The budget also indicates the introduction of a new tax code this week, which could reveal a more liberal tax environment. The report concludes with an overweight rating for Financials, Consumer Discretionary, Industrials, and Technology sectors, while underweighting other sectors.