Budget 2026 realistic, stronger capex to aid growth: Morgan Stanley

Morgan Stanley said the FY27 Budget backs growth through three pillars: a continued manufacturing push, stronger support for services and a renewed emphasis on capital expenditure

The Union Budget 2026–27 strikes a realistic balance between fiscal repair and growth support, with an emphasis towards capital expenditure (capex), investment banking giant Morgan Stanley said on Sunday.

 

“The Budget balances debt to gross domestic product (GDP) reduction with slow-paced fiscal consolidation and support for growth through cyclical and structural measures,” it said, highlighting a fiscal deficit target of 4.3 per cent of GDP for the financial year 2026–27 (FY27), in line with a central government debt-to-GDP ratio of 55.6 per cent.

 

Morgan Stanley said the FY27 Budget backs growth through three pillars: a continued manufacturing push, stronger support for services and a renewed emphasis on capex. Measures include incentives for semiconductors and rare earths, tax breaks for data centres and higher safe harbour limits.

 

 

The brokerage noted that total capex is set to rise 11.5 per cent year on year, with defence capex up 18 per cent.

 

Although the Centre has raised its capital expenditure allocation in absolute terms, capex as a share of GDP has remained steady at 3.1 per cent in FY27, similar to the revised estimates of FY26. 

 

It further stated that it remains “Overweight” on financials, consumer discretionary and industrials, citing expectations of stronger FY27 earnings driven by higher capital expenditure, improving services sector momentum and rising investments in artificial intelligence (AI).

 

“The Budget speech almost begins with the word ‘semiconductors’, which signals a major pivot in the government’s view of what India should pursue. A likely boost to capex, services sector growth and AI, along with slightly slower-than-expected fiscal consolidation, will likely support FY27 earnings, further helped by increased demand for equities through buybacks,” it said.