Finance Minister Nirmala Sitharaman has managed to meet the goals of boosting consumption through tax cuts, increasing capex through transfers to states, and maintaining the path of fiscal consolidation, with announcements made in the Union Budget on February 1. Going forward, Morgan Stanley said that cyclical growth recovery is expected, supported by both fiscal and monetary measures.
Budget 2025 has balanced the 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 FY26 while it reduced income taxes to support consumption, especially for low/ middle income tax payers, and expanded capex growth, mainly through a boost in grants to states for capex creation. The direct tax changes, the finance minister stated, should lead to a revenue loss of Rs 1000 billion, which should ultimately help support consumption. On the spending side, the mix remains tilted to capex, with effective capex seen growing at 17.4 per cent in F2026BE vs 5.3 per cent of F2025RE.
What will be the macro implications?
Upasana Chachra, Chief India Economist, Morgan Stanley, said, “The Budget has maintained the fiscal consolidation path, albeit a tad faster than our expectation. As such, 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. In our view, both fiscal and monetary policy are pivoting to support growth, which is in line with our view of a cyclical recovery in growth.”
– Growth to be supported by capex and consumption: The reform policies announced in the Budget are to provide a broad-based fillip to both capex and consumption. Tax rationalisation is likely to support consumption levels and continued strength in effective capital expenditure should generate its multiplier impact on the economy, while supporting job creation. Further, reforms announced in the key segments such as agriculture, MSMEs, investments in people and socio-economic infrastructure, and exports will create a strong foundation to meet India’s objective of Viksit Bharat.
– Macro-stability to remain in check as fiscal consolidation continues: Nirmala Sitharaman has targeted a fiscal consolidation path for FY26 at 4.4 per cent of GDP, while penciling in a consolidation path for the central government’s debt over the medium term, so as to reach 50 per cent (plus or minus 1%) of GDP by F2031. Morgan Stanley said that a benign and stable trend in the macroeconomic environment forms the basis of a sustained growth trajectory, while fiscal pragmatism can help to ensure debt sustainability.
– Monetary policy to provide support to growth: Domestic growth and inflation dynamics will help ease and will likely outweigh the concern of volatility stemming from external factors in the policy on February 7. “We thus expect the RBI to provide support through different levers to ease liquidity conditions, regulatory burdens, and policy rates. We expect the RBI to build on the measures announced previously to improve liquidity through a rate cut in the next policy preview,” said Upasana Chachra.
Budget 2025: Key themes
1. Maintaining the fiscal consolidation path: The government has pegged the fiscal deficit target at 4.4 per cent of GDP for F2026 which means that the Government aims to ensure that the Central Government debt moderates to 50 per cent of GDP by F2031 over the medium term.
2. Spending mix skewed toward capex: Capital expenditures in the Budget for F2026 are pegged at Rs 11.2 trillion, growing 10.1 per cent YoY vs 7.4 per cent YoY in FY2025. The central government continues to push states to increase capex, as it budgeted Rs 1.5 trillion for 50-year interest-free loans to states to be treated as capex, vs Rs 1.25 trillion in F2025RE. The additional aid grants cater mainly to segments such as water, health, education, and rural development, and aim to augment social infrastructure capacities to enhance overall productivity.
3. Other Policy Priorities
The Budget outlines four engines of development – Agriculture, MSME, Investment and Exports – to meet its objective of Viksit Bharat over the medium term.
Agriculture: Reforms ranging from enhanced credit through KCC, development of high-yielding seeds, improving productivity and sustainability of cotton farming, and achieving self-reliance in pulses are likely to support agriculture growth.
MSME: The Budget reclassifies the investment and turnover guidelines for MSMEs. In addition, it seeks to provide customised credit cards for micro enterprises, launch a new scheme for first time entrepreneurs, and double the credit guarantee turnover for MSME’s and startups.
Investment: A key focal point of the Budget remains investment in people, economy, and innovation. Social infrastructure encompassing health and education facilities, such as expansion of IITs, skilling centres, and day care cancer centres have been announced. Economic infra development appears likely to be supported by interest-free loans to states and reforms in water, power, nuclear energy, etc.
Exports: Measures to promote exports include easier access to credit, digital public infra for international trade to integrate with global supply chains, guidance to states for promoting GCCs in tier 2 cities, and upgrading of infra and warehousing for air cargo.