Finance minister may focus on job creation and fiscal prudence, says Morgan Stanley, ETCFO

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Emphasising fiscal prudence, the government aims to maintain a fiscal deficit target of 5.1 per cent of GDP, aligning with the interim budget and underscoring its commitment to sustainable economic growth, according to a Morgan Stanley Research Report on ‘India Economics & Strategy – Asia Pacific – What to Expect from Budget F2025’.

As per the report, expectations for fiscal consolidation in F2025 are high, with the fiscal deficit target projected to remain steady at 5.1 per cent of GDP, compared to 5.6 per cent in F24, and aiming to reach 4.5 per cent of GDP by F2026. Enhanced fiscal headroom, bolstered by a larger-than-expected surplus transfer from the Reserve Bank of India (RBI), is expected to sustain momentum in capex expenditure and increase targeted welfare spending.

“Job creation supported through capex, targeted social sector spending, and a focus on the ‘Viksit Bharat’ plan are likely to be pivotal themes in the upcoming budget,” the report noted. It anticipates a roadmap for achieving ‘Developed Nation’ status by 2047 and outlines medium-term plans for fiscal consolidation beyond F26, underscoring the government’s strategic priorities.

Stakeholders across sectors are eagerly awaiting the Finance Minister‘s announcements, which are expected to provide clarity on economic policies aimed at fostering growth and resilience. With India Inc. keenly observing, the budget presentation on July 23 is poised to shape the economic landscape for the fiscal year ahead, navigating challenges while capitalising on opportunities for sustainable development.

Equity Market StrategyAccording to analysts, the impact of the Budget on the market has shown a secular decline, though actual performance hinges on pre-Budget expectations, as measured by market performance prior to the budget release. Currently, the market is approaching the Budget with optimism, anticipating potential volatility and correction post-budget, based on historical patterns.

Key market indicators to monitor, as per the report, include the extent of fiscal consolidation, expected to range between 0 to 10 basis points of GDP over the interim budget, and anticipated increases in spends on physical and social infrastructure by about 20-25 basis points of GDP over the interim budget. Sector-specific incentives and spends, particularly in Financials, Consumer Discretionary, Industrials, and Technology sectors, are expected to drive market sentiment.

Analysts, as per the report, do not foresee major tax cuts or redistribution spends, which could surprise the market. The strategy recommends overweight positions in Financials, Consumer Discretionary, Industrials, and Technology sectors, while underweighting all other sectors.

Macro Strategy

According to the strategy outlined in the report, a consistent Budget deficit compared to the interim Budget suggests no change to gross and net issuance of Government Securities (G-Secs). Strong demand for G-Secs in FY25, bolstered by foreign investors following the Global Bond Index-Emerging Markets (GBI-EM) inclusion, supports stable INR and G-Secs as favourable carry trades.

The report recommends short positions on CNH/INR and TWD/INR, alongside long positions in 10-year G-Secs with FX hedge, reflecting confidence in stable market conditions amidst fiscal policy adjustments.