In its analysis of the Union Budget 2024, Morgan Stanley has underscored the government’s emphasis on fiscal consolidation, maintaining capital expenditure momentum, and fostering job creation through skill enhancement initiatives.

What Happened: The FY2025 Budget, unveiled on Tuesday, prioritises fiscal consolidation, setting the fiscal deficit at a 5-year low of 4.9% of GDP for FY25, the analysts noted. The consolidated fiscal deficit is projected to be around 7.7% of GDP in FY25, marking another 5-year low.

The budget also stresses on preserving capex momentum and promoting skills and job creation through specific government schemes. These measures aim to enhance the medium-term growth potential and boost formal employment.

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“The Budget has pegged a faster-than-expected reduction of the fiscal deficit in FY25 on the back of stronger revenues, mainly RBI’s transfer of surplus,” the research note noted. The increased fiscal headroom has been used to support job creation and skill enhancement while reducing the fiscal deficit and maintaining capex growth.

Furthermore, the budget seeks to lay the groundwork for medium-term growth through employment, skill enhancement schemes, and support for the Micro, Small and Medium Enterprise (MSME) sector.

Morgan Stanley highlighted three major surprises in the Budget:

1. The unique incentive scheme for job creation could boost profits if effective.
2. Simplification of the tax code, including unification of TDS and capital gains tax rates, rationalisation of import duties, removal of the angel tax, and a promise for further simplification by the next Budget.
3. The lower-than-expected fiscal deficit aids private capital expenditure and loans, which is positive for corporate profits.

While the lack of populist spending was expected, the increase in capital gains tax for equities was not, the research firm said in a note. Despite this, Morgan Stanley remains positive on Indian equities, favouring large caps over small- and mid-caps. The analysts are overweight on Financials, Consumer Discretionary, Industrials, and Technology sectors, while underweight in others.

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