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India's Fiscal Deficit Target 4.2% for FY27, Debt to Moderate: Morgan Stanley

A Morgan Stanley report projects the Indian government will set its fiscal deficit target at 4.2% of GDP for the financial year 2027. This is part of a consolidation path expected to reduce central government debt to 55.1% of GDP. The report highlights that stronger nominal growth will boost tax collections, allowing a continued focus on capital expenditure and social infrastructure. For markets, key watchpoints include the extent of fiscal consolidation, capex plans, and potential capital market reforms to attract foreign flows.

Key Points: India FY27 Fiscal Deficit Target 4.2% of GDP, Says Morgan Stanley

  • Fiscal deficit target 4.2% of GDP for FY27
  • Central government debt seen falling to 55.1%
  • Capex and social spending remain priorities
  • G-Sec issuance projected at Rs 11.6 trillion net
  • Domestic demand to drive GDP growth amidst global uncertainty
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India's fiscal deficit to be set at 4.2 pc of GDP for FY27: Morgan Stanley

Morgan Stanley report forecasts India's fiscal deficit at 4.2% of GDP for FY27, with debt moderating to 55.1%. Key budget themes include capex and social spending.

"A pickup in nominal growth will help to lift tax buoyancy and improve tax collections - Morgan Stanley report"

New Delhi, Jan 16

The central government's fiscal deficit is expected to be set at 4.2 per cent of GDP for FY27 in the upcoming Union Budget - corresponding to moderation in debt to 55.1 per cent of GDP, a Morgan Stanley report said on Friday.

The pace of consolidation will be consistent with central government debt reduction to 55.1 per cent of GDP from 56.1 per cent in FY26.

"A pickup in nominal growth will help to lift tax buoyancy and improve tax collections in FY2027, helping the government to prioritise capex and social infrastructure-related spending alongside gradual consolidation," the report mentioned.

Focus on capex to help create jobs, targeted social sector spending, and a step up in structural reform momentum are likely to be key themes, it added.

The impact of the budget on the market has been on a secular decline, albeit actual performance is a function of pre-budget expectations (as measured by market performance ahead of the budget).

"As of now, the market appears to be approaching the budget with skepticism and could be dealing with both volatility and upside risk post-budget, if history is a guide," said the report.

For the market, the key things to watch are the extent of fiscal consolidation, capex, and sector-level actions.

"Of particular interest will be capital market reforms to encourage a revival in foreign portfolio flows. We are overweight on Financials, Consumer Discretionary, and Industrials," the report mentioned.

Consistent with the path of continued fiscal consolidation, "we expect net issuance of G-Secs to remain broadly stable at Rs 11.6 trillion (FY26: Rs 11.5 trillion)."

"Gross issuance may pick up to Rs 15.8 trillion (FY26: INR 14.8 trillion) given the larger amount of redemptions. Our issuance projections are on the lower end of market expectations and could help G-secs rally temporarily if realised, providing an opportunity to pay rates," said the report.

The global brokerage expects domestic demand to drive GDP growth, amidst continued tariff and geopolitics-related global uncertainty weighing on external demand.

"The sustained strength in high-frequency data in QE Dec-25 is encouraging - it reinstates domestic demand carrying the growth baton for India. Moreover, the combined impetus from fiscal and monetary policy, improved purchasing power and labour market outlook is likely to ensure that consumption recovery is sustained," it noted.

- IANS

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Reader Comments

R
Rahul R
Moderation in debt to 55.1% is a positive signal for the economy's health. However, I'm skeptical about the market's reaction. As the report says, there's a lot of pre-budget volatility. Let's see if the capex push actually translates to more jobs on the ground.
A
Arun Y
The report is optimistic, but what about inflation? Increased government spending, even on capex, can fuel it. The common man is already struggling with prices. Fiscal discipline is good, but not at the cost of neglecting immediate consumption support for the middle and lower classes.
S
Sarah B
Interesting analysis from Morgan Stanley. The emphasis on domestic demand driving growth is key, especially with global uncertainties. If capital market reforms can attract foreign flows, it will be a big boost. Overweight on Financials and Industrials makes sense for the India growth story.
K
Karthik V
Stable G-Sec issuance is a relief for bond markets. Lower borrowing can help keep interest rates in check, which is good for home loans and business expansion. Hope the budget lives up to these projections. Jai Hind! 🇮🇳
M
Meera T
While the macro numbers look fine on paper, I respectfully disagree with the overwhelming optimism. The "targeted social sector spending" needs to be substantial and well-executed. We've seen reports before; the proof is in the implementation. The budget must address rural distress and healthcare gaps directly.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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