Budget impact: What keeps Morgan Stanley’s Ridham Desai bullish on Indian equities

Even after the Sensex and Nifty ended around 2% lower post-Union Budget, Morgan Stanley’s Ridham Desai maintains his bullish stance on Indian equities, arguing that a rare combination of cyclical support and structural reforms will support earnings growth and support premium valuations for domestic equities.The budget targets a fiscal deficit of 4.3% of GDP for FY27, only a superficial improvement from FY26’s 4.4%, but Desai sees that as a conscious decision to support growth rather than pursue aggressive consolidation. “The budget balances the reduction in debt-to-GDP ratio with slow fiscal consolidation and support for growth through cyclical and structural measures,” notes Morgan Stanley’s Indian equity strategist in the report co-authored with Chief Indian Economist Upasana Chachra.

The government’s calculations, based on nominal GDP growth of 10% and direct tax revenue growth of 11.4%, are described as “realistic”, reducing the risk of mid-year cuts that could derail the recovery.

At the heart of Desai’s stock call is the capital investment that New Delhi has sought to maintain even as it embarks on a consolidation path. The report points out that central government capital expenditure in FY27 is budgeted at 3.1% of GDP, which is largely unchanged from the revised estimate for FY26, while total investment is expected to grow by 11.5% year-on-year and defense investment by 18%.

Morgan Stanley argues that this will “support the recovery of cyclical growth” by sustaining the investment cycle and the crowding out of private capital investment, a backdrop that typically favors domestically focused stocks in banks, consumer discretionary and industrial sectors – sectors where the house is still “overweight”.

At the same time, Desai emphasizes what he calls a decisive policy turn towards forward-looking sectors. “The Budget speech almost begins with the word ‘semiconductors’, marking a major turning point in the government’s view of what India should pursue,” the report notes, highlighting new measures under “ISM 2.0”, incentives for rare earth magnets and support for old industrial clusters.

On the services side, strategists highlight steps such as higher safe harbor thresholds, a tax exemption for data centers and a stated ambition to reach a 10% share of global exports by 2047 as evidence of a long-term agenda to increase India’s share in high-value global supply chains. For equity investors, Morgan Stanley believes this dual focus on manufacturing and services, layered on a still accommodative fiscal policy, directly contributes to the earnings story. The House expects “a likely boost to capital investment, service sector growth and AI, along with somewhat slower-than-expected fiscal consolidation. [to] support earnings for 2027, further aided by increased demand for shares through buybacks.”

In Desai’s framework, sustained earnings growth, a credible debt glide path and an explicit push into semiconductors, data and AI together justify remaining constructive on Indian equities even after the market’s recent outperformance. “We remain constructive on Indian equities – overweight financials, consumer discretionary and industrials,” the report reiterates, underscoring why Morgan Stanley’s Indian equity strategist is opting to remain bullish in the post-Budget market rather than blunting the rally.