Mumbai (TIP)- US investment bank Morgan Stanley has said the Indian government is likely to retain fiscal deficit target at 5.1 percent of GDP in FY25, in line with the interim budget. Fiscal prudence, capital expenditure spending to help create jobs and targeted social sector spending are likely to be key themes of the Budget, it said. The government will unveil the Union Budget on July 23. The fiscal deficit target which was 5.6 per cent of GDP in F24 is expected to be on track to attain the target of 4.5 per cent of GDP by FY26, Morgan Stanley report said. “The fiscal headroom has improved with a larger-than-expected transfer of surplus from the RBI, which in our view will help to maintain the momentum on capex expenditure and increase targeted welfare spending,” it said.
Morgan Stanley said it expects the possibility of a slightly lower fiscal deficit target (tad below 5.1 per cent of GDP) given the support from tax and non-tax revenues.
According to the report, job creation supported through capex, targeted social sector spending and focus on ‘Viksit Bharat’ plan are likely to be the themes in the budget. “With fiscal prudence guiding the overall fiscal policy stance, we expect the focus to remain on capex expenditure over revenue expenditure and targeted social sector spending with focus on improving access to physical, social and digital infrastructure,” Morgan Stanley said.
“We also expect the budget to provide focus on the government’s road-map for ‘Viksit Bharat’ (developed nation) by 2047. In addition, the budget could also give a road-map for a medium-term plan for fiscal consolidation beyond FY26,” it said.
It said the impact of the budget on the market has been on a secular decline, albeit actual performance is a function of pre-budget expectations (as measured by market performance ahead of the budget). As of now, the market seems to be approaching the budget with exuberance and could be dealing with both volatility and a correction post budget, if history is a guide, Morgan Stanley said.
“For the market, the key things to watch are the extent of fiscal consolidation (0 to 10 bps of GDP over the interim budget), the delta in spends on physical and social infrastructure (by about 20-25bps of GDP over the interim budget), sector level incentives/spends and changes to capital gains tax rates for equities… which we do not expect,” the report said.
“We think the market could be surprised by the lack of major tax cuts or redistribution spends. We are overweight financials, consumer discretionary, industrials and technology and underweight all other sectors,” it said.