Budget impact: What makes Morgan Stanley’s Ridham Desai remain bullish on Indian stocks

Even after the Sensex and Nifty ended around 2% lower after the Union Budget, Morgan Stanley’s Ridham Desai is keeping his bullish stance on Indian equities, arguing that a rare combination of cyclical support and structural reform will underpin earnings growth and sustain premium valuations for domestic stocks.

The Budget targets a fiscal deficit of 4.3% of GDP for FY27, only a shallow improvement from 4.4% in FY26, but Desai sees that as a deliberate choice to back growth rather than push aggressive consolidation. “The Budget balances debt-to-GDP reduction with slow paced fiscal consolidation and support for growth through cyclical and structural measures,” the Morgan Stanley India equity strategist notes in the report co-authored with chief India economist Upasana Chachra.

The government’s math, built on 10% nominal GDP growth and 11.4% growth in direct tax revenues, is described as “realistic,” reducing the risk of mid-year spending cuts that could derail the recovery.

Central to Desai’s equity call is the capex push that New Delhi has chosen to preserve even as it walks the consolidation path. The report points out that central government capital expenditure is budgeted at 3.1% of GDP in FY27, broadly unchanged from the FY26 revised estimate, while total capex is slated to grow 11.5% year-on-year and defence capex by 18%.

Morgan Stanley argues this will “support cyclical growth recovery” by sustaining the investment upcycle and crowding in private capex, a backdrop that typically favours domestically oriented stocks in banks, consumer discretionary and industrials—sectors where the house remains “Overweight.”

At the same time, Desai highlights what he calls a decisive policy pivot towards future-facing sectors. “The budget speech almost begins with the word ‘semiconductors,’ which signals a major pivot in the government’s view of what India should pursue,” the report notes, flagging new measures under “ISM 2.0”, incentives for rare earth magnets and support for legacy industrial clusters.
On the services side, the strategists underline steps such as higher safe-harbour thresholds, a tax holiday for data centres and a stated ambition to reach a 10% share of global exports by 2047 as evidence of a long-term agenda to lift India’s share in high-value global supply chains.For equity investors, Morgan Stanley believes this dual focus on manufacturing and services, layered over a still-accommodative fiscal stance, feeds directly into the earnings narrative. The house expects “a likely boost to capex, services sector growth and AI, along with slightly slower than expected fiscal consolidation, [to] support F2027 earnings, further helped by increased demand for equities through buybacks.”

In Desai’s framework, sustained profit growth, a credible glide path on debt and an explicit push into semiconductors, data and AI together justify staying 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 India equity strategist is choosing to stay bullish on the post-Budget market rather than fade the rally.