The central government aims to set the fiscal deficit at 4.2% of GDP for FY27 in the upcoming Union Budget, down from the 4.4% target in FY26, according to a report by Morgan Stanley. This move is expected to lead to a decrease in debt to 55.1% of GDP from the previous 56.1% in FY26.
The report highlighted that an increase in nominal growth would enhance tax buoyancy and boost tax collections in FY2027. This improvement is anticipated to enable the government to focus on capital expenditure and social infrastructure-related spending while gradually consolidating its finances.
Emphasizing the importance of capital expenditure for job creation, targeted social sector spending, and a push for structural reforms, the report outlined these as key themes for the upcoming budget. It also noted that market reactions to the budget have been declining, influenced by pre-budget expectations.
The report cautioned that the market is currently approaching the budget with skepticism, potentially facing volatility and upside risks post-budget, based on historical trends. Key areas of interest for the market include the extent of fiscal consolidation, capital expenditure plans, and sector-specific initiatives.
Anticipating stable net issuance of G-Secs at Rs 11.6 trillion for FY27, the report suggested that gross issuance might rise to Rs 15.8 trillion due to increased redemptions. The report’s issuance projections, considered conservative by market standards, could lead to a temporary rally in G-Secs if realized, offering an opportunity for rate adjustments.
Expecting domestic demand to be the driving force behind GDP growth, the report highlighted global uncertainties related to tariffs and geopolitics affecting external demand. It expressed optimism in India’s growth prospects, citing encouraging high-frequency data and the combined support from fiscal and monetary policies, improved purchasing power, and labor market conditions.
