India pivots fiscal and monetary policies to drive economic recovery

India’s fiscal and monetary strategies are pivoting towards supporting economic growth, aligning with expectations of a cyclical recovery, as highlighted in a report by Morgan Stanley. The Union Budget has advanced fiscal consolidation faster than expected while implementing measures to boost consumption and expand capital expenditure, fostering economic growth.

The Budget emphasises a dual focus: maintaining fiscal discipline and stimulating economic expansion. A lower fiscal deficit target of 4.4% of GDP for FY26 has been set, slightly below Morgan Stanley’s projection of 4.5%. Tax reductions, particularly for low- and middle-income groups, are a significant feature designed to spur consumption. The Finance Ministry estimates these changes will result in a revenue loss of INR 1,000 billion, or 0.3% of GDP, effectively increasing disposable income and spending power.

Simultaneously, the government has prioritised infrastructure growth through robust capital expenditure. Effective capital expenditure, which combines direct capex with grants for asset creation, is projected to grow by 17.4% in FY26 compared to a modest 5.3% growth in FY25 revised estimates. Grants to states form a key component of this increase, aimed at long-term economic development and infrastructure upgrades.

Morgan Stanley views this synchronisation of fiscal and monetary policies as a strategic approach to sustain economic recovery. By balancing targeted spending with fiscal prudence, the government signals its intent to boost demand while ensuring macroeconomic stability remains intact.

Source: Economic Times