Budget math looks realistic, economic growth to pick up pace: Morgan Stanley

New Delhi, Feb 3: The Union Budget has managed to meet the goals of boosting consumption though tax cuts, increasing capex through transfers to states, and maintaining the path of fiscal consolidation which is expected to lead to a recovery in the economic growth rate with macro stability in a comfortable range, according to a Morgan Stanley report released on Monday.

The report said that both fiscal and monetary policy are pivoting to support growth, which is in line with “our view of a cyclical recovery in growth”. “The Budget math looks realistic, with nominal GDP assumed at 10.1 per cent for F2026 and gross tax revenue growth of 10.8 per cent. We will remain watchful of income tax collection growth, which the government expects to be 14.4 per cent, given the income tax cuts and execution of capex spending to meet the targets,” the report stated.

The report pointed out that the Budget has balanced needs to support growth and continue with fiscal consolidation. As such, the Budget targets a lower fiscal deficit of 4.4 per cent of GDP for F2026 even as it reduced income taxes to support consumption, especially for middle income tax payers, and expanded capex growth, mainly through a boost in grants to states for capex creation.

“Indeed, as per the Finance Minister, direct tax changes should lead to a 1.0 per cent revenue loss of Rs 1 lakh crore (0.3 per cent of GDP), which should help support consumption,” the Morgan Stanley report said. On the spending side, the mix remains tilted to capex, with effective capex (direct capex plus grants in aid of creation of capital assets) seen growing at 17.4 per cent in F2026BE vs. 5.3 per cent of F2025RE.

“We expect the Budget to support growth recovery through measures to promote consumption and increase effective capex spending, which will likely lead to a more broad-based recovery, while at the same time continued consolidation should help macro stability remain in check,” the report observed. The simultaneous boost to consumption and capex has to be sweet for equities, especially in the context of continuing and better-than-anticipated fiscal consolidation (projected primary deficit: 0.8 per cent).

The plethora of announcements around easing of India's tax regime, including permanent establishment rules, GIFT city clarifications, extension of exemptions to sovereign funds, and changes to tax deduction and collection at source could improve FDI and private investment sentiment, according to the report. “A new tax code is coming this week, as per the Budget, which could reveal a more liberal tax environment. We are overweight Financials, Consumer Discretionary, Industrials and Technology, and underweight other sectors,” the report added.