Budget Impact: Ridham Desai Maintains Bullish Outlook on Indian Stocks
Despite a 2% decline in the Sensex and Nifty following the Union Budget announcement, Morgan Stanley’s Ridham Desai remains optimistic about Indian equities. He attributes this confidence to a rare blend of cyclical support and structural reforms poised to drive earnings growth and uphold premium valuations for domestic stocks.
Reasons for Bullish Sentiment on Indian Stocks
– Fiscal Deficit Targets: The Budget sets a fiscal deficit of 4.3% of GDP for FY27, slightly improving from 4.4% in FY26. Desai views this as a strategic choice, prioritizing growth over aggressive fiscal consolidation. He explains, “The Budget balances debt-to-GDP reduction with a measured fiscal approach, offering support for growth through both cyclical and structural initiatives,” as outlined in his report with chief India economist Upasana Chachra.
– Realistic Government Projections: The government plans are built on a 10% nominal GDP growth and an 11.4% rise in direct tax revenues, which Desai deems “realistic.” This reduces the likelihood of mid-year spending cuts that could hinder recovery.
– Capital Expenditure Insights: A critical aspect of Desai’s optimism is the government’s commitment to capital expenditures (capex). The report notes that central government capex is budgeted at 3.1% of GDP for FY27, consistent with revised estimates for FY26. Total capex is projected to grow by 11.5% year-on-year, with defense-related expenditures rising by 18%. Morgan Stanley indicates that this push will enhance cyclical growth recovery and stimulate private capex, favoring sectors such as banks, consumer discretionary, and industrials—areas where they maintain an “Overweight” stance.
Strategic Focus on Future-Facing Sectors
Desai emphasizes the government’s significant shift in policy towards high-potential sectors. He notes, “The budget speech prioritizes ‘semiconductors,’ signaling a critical transformation in the government’s vision.” The report highlights initiatives under “ISM 2.0,” including incentives for rare earth magnets and support for legacy industrial clusters.
– Service Sector Developments: Key improvements in the services sector include higher safe-harbour thresholds, a tax holiday for data centers, and a goal to capture a 10% share of global exports by 2047, all indicative of a long-term strategy to increase India’s involvement in high-value global supply chains.
Earnings Prospects and Market Outlook
For equity investors, Morgan Stanley believes this dual focus on manufacturing and services, combined with an accommodative fiscal approach, feeds directly into a positive earnings narrative. Desai forecasts that:
– An increase in capex, growth in the services sector, and advancements in AI will likely support earnings for FY27.
– Sustained profit growth, a manageable reduction in debt, and a targeted focus on semiconductors, data, and AI all justify a constructive stance on Indian equities despite the recent market rally.
In conclusion, Ridham Desai remains confident in the potential of Indian stocks, reinforcing Morgan Stanley’s positive outlook on Financials, Consumer Discretionary, and Industrials. By balancing growth demands with fiscal prudence, the Indian market appears well-positioned for sustained performance in the coming years.