India’s fiscal deficit to be set at 4.2 pc of GDP for FY27: Morgan Stanley

New Delhi: 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 (against the target of 4.4 per cent in FY26) — 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