As finance minister Nirmala Sitharaman prepares to present the Union Budget for 2026–27 on February 1, global investment bank Morgan Stanley expects the government to stay focused on fiscal discipline, capital spending and long-term growth, rather than populist measures.
Despite global headwinds from tariff tensions and geopolitical uncertainty, India’s economy remains resilient. According to Morgan Stanley, Budget 2026 is likely to reinforce the government’s medium-term consolidation roadmap while pushing reforms across infrastructure, manufacturing and job creation.
Morgan Stanley expects the Centre to:
Target a fiscal deficit of 4.2 percent of GDP in FY27, lower than the 4.4 percent target for FY26
Maintain the slowest pace of consolidation since FY23, allowing room for growth spending
Reduce central government debt from 56.1 percent of GDP in FY26 to 55.1 percent in FY27
Over the medium term, the government is expected to continue gradual consolidation to reach its debt-to-GDP target of 50 percent (±1 percentage point) by FY31. Strong nominal growth is expected to support tax collections and fund capital expenditure and social infrastructure.
Morgan Stanley expects the Budget to focus on:
Expansion of social and physical infrastructure
Improving ease of doing business to boost private investment
Creating productive jobs alongside skill development
Strengthening domestic manufacturing
Enhancing ease of living for citizens
Home loan interest deduction for self-occupied houses under the new tax regime
Revival of Credit Linked Subsidy Scheme (CLSS) with 3–4 percent subsidy
Raising affordable housing price cap to ₹75 lakh from ₹45 lakh
Higher spending on EV charging infrastructure
Clarity on incentives for domestic production of rare earth magnets
Incentives for digital payments
Uniform tax treatment on interest income
Expanded credit guarantees for MSMEs and MFIs
Simplified interest subsidy under PMAY 2.0
Relief on USOF charges until existing funds are used
Possible reforms on AGR dues and licence fees
Extended loss carry-forward period from 8 to 16 years
Incentives for data centres, including duty waivers on GPUs
Railways allocation growth of 5–6 percent, with focus on safety, new corridors and trains
Defence spending seen rising 12–15 percent, benefiting domestic manufacturers
Higher outlays for infrastructure-linked sectors
Focus on clean energy, battery storage, nuclear and pumped storage
Policy push for critical minerals and rare earths
Morgan Stanley expects broad measures to revive consumption, along with continued emphasis on healthcare spending, pharma R&D incentives, API self-reliance and expansion of Ayushman Bharat.
Overall, Budget 2026 is expected to balance fiscal discipline with growth-oriented reforms, keeping long-term competitiveness firmly in focus.
(By arrangement with livemint.com)
