Global financial services firm Morgan Stanley has reaffirmed its 'overweight' position on Indian equities in the aftermath of the Union Budget 2026, which was presented on February 1. The brokerage's analysis indicates that the budget successfully strikes a delicate balance between fiscal consolidation and growth-oriented measures, potentially bolstering India's economic trajectory in the medium term.
Balancing Fiscal Discipline with Growth Support
According to Morgan Stanley's assessment, the Union Budget 2026 meticulously blends cyclical recovery initiatives with long-term structural reforms. The brokerage emphasized that this approach could significantly strengthen India's growth path through enhanced capital expenditure, improved manufacturing competitiveness, and targeted incentives for the services sector.
The budget achieves a careful equilibrium between reducing debt-to-GDP ratios and maintaining a gradual pace of fiscal consolidation while simultaneously supporting economic growth through both cyclical and structural interventions, stated the brokerage in its official commentary.
Sectoral Preferences and Investment Strategy
Morgan Stanley has specifically reiterated its constructive outlook on Indian equities, maintaining overweight positions in three key sectors: Financials, Consumer Discretionary, and Industrials. The brokerage anticipates these sectors will derive substantial benefits from the policy direction established in Budget 2026.
The growth-oriented nature of the budget was particularly evident in its strong emphasis on capital expenditure and clear sectoral priorities. These include strategic focus areas such as semiconductors, rare earth magnets, industrial clusters, data centers, and services exports.
Macroeconomic Framework and Fiscal Parameters
Morgan Stanley highlighted that the government has opted for the most gradual pace of fiscal consolidation witnessed since the pandemic period, while still maintaining a credible pathway toward reducing the debt-to-GDP ratio. The fiscal deficit for FY27 has been budgeted at 4.3% of GDP, compared to 4.4% in the FY26 Revised Estimates.
Meanwhile, central government debt is projected to reach 55.6% of GDP. The brokerage views this calibrated approach as pragmatic, as it preserves growth momentum without compromising fiscal discipline.
Capital Expenditure Momentum
The budget outlines significant increases in capital expenditure allocations. Total capital expenditure is set to rise by 11.5% year-over-year in FY27, while defense capex is budgeted to increase by 18% year-over-year. Crucially, central government capex will be maintained at 3.1% of GDP, mirroring the FY26 Revised Estimates.
This continuity ensures sustained momentum in public investment, which Morgan Stanley expects to provide cyclical support to economic growth at a time when private sector capital expenditure is gradually improving.
Cyclical Recovery and Structural Strengthening
Morgan Stanley elaborated that the budget is poised to support cyclical growth recovery through its sustained emphasis on capital expenditure. The maintenance of central government capex at 3.1% of GDP in FY27, consistent with FY26 levels, forms a cornerstone of this strategy.
Simultaneously, the budget aims to strengthen India's structural growth trend through measures designed to enhance manufacturing competitiveness and increase the attractiveness of the services sector.
Earnings Growth Prospects
The brokerage concluded that the combination of sustained capital expenditure, structural reforms in manufacturing and services, and a calibrated fiscal path could effectively support earnings growth into FY27. This optimistic outlook reinforces Morgan Stanley's overweight stance on Indian equities.
The firm's sector-specific preferences reflect expectations that Financials, Consumer Discretionary, and Industrials will benefit most substantially from the policy framework established in Budget 2026.
Disclaimer: The views and recommendations presented above are those of individual analysts or broking companies, and not of Mint. Investors are advised to consult with certified experts before making any investment decisions.
