Morgan Stanley expects the government to target a fiscal deficit of 4.2% of GDP in FY27, marking a gradual consolidation from the 4.4% target set for FY26, as Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026-27 on February 1. The investment bank anticipates the budget will steer clear of populist measures while prioritizing capital expenditure and social infrastructure investment.

Fiscal Position and Outlook

India's current fiscal metrics show mixed performance compared to previous periods:

Morgan Stanley projects the central government debt will reduce to 55.1% of GDP from 56.1% in FY26, supported by improved tax buoyancy and nominal growth pickup. The government aims to achieve a debt-to-GDP ratio of 50% (±1 percentage point) by FY31.

Budget Priorities and Themes

The investment bank expects the budget to reflect five key priorities: social and physical infrastructure expansion, improving ease of doing business to boost private investments, creating productive jobs alongside workforce skilling, increasing manufacturing capabilities, and enhancing ease of living.

Sector-Specific Reform Expectations

Real Estate and Housing

Morgan Stanley anticipates significant policy changes for the real estate sector:

Infrastructure and Railways

The infrastructure sector expects substantial allocation increases:

• Overall Infrastructure: 8-10% allocation growth over revised FY26 estimates
• Railways: 5-6% growth focusing on track infrastructure, new routes, safety systems, and rolling stock
• Defence: 12-15% allocation increase with emphasis on local and private defence companies

Telecom and Technology

Key telecom sector expectations include relief on Universal Service Obligation Fund charges, AGR dues reform package, and extension of business loss carry-forward period from eight to 16 years. For data centre developers, the bank expects conditional tax holidays linked to capacity targets and customs duty waivers on imported equipment.

Energy and Clean Technology

Morgan Stanley sees potential for a ₹2.00 per litre increase in fuel taxes, alongside continued government thrust on renewable energy, battery energy storage systems adoption, nuclear power including small modular reactors, and pumped storage projects. The energy distribution sector may receive a financial package for discoms with reform conditions.

Healthcare and Pharmaceuticals

The pharmaceutical sector expects continued emphasis on increasing public health spending, with focus on primary healthcare, hospital infrastructure, and workforce capacity. Expected measures include R&D tax benefits, API support through PLI schemes, reduced import dependence for critical drugs, and Ayushman Bharat expansion.

Financial Services and Consumer Sectors

For financial services, analysts highlight needs for digital payment incentives, harmonized tax treatment on interest income, and expanded credit guarantee schemes for MSMEs and MFIs. The consumer sector anticipates general measures to revive consumption demand.

Morgan Stanley's comprehensive sector analysis reflects expectations for a budget focused on sustainable growth, infrastructure development, and gradual fiscal consolidation while maintaining India's economic resilience amid global uncertainties.

The All India Gem & Jewellery Domestic Council (GJC) has submitted comprehensive pre-Budget recommendations to Finance Minister Nirmala Sitharaman ahead of Union Budget 2026-27. The submission, made this week, outlines strategic tax and policy measures designed to ease cost pressures, improve compliance, and support small and medium jewellers in the domestic market.

GJC, representing India's domestic gems and jewellery trade, stated that the proposals address structural issues intensified by sharp gold price increases over the past year. According to the council, higher gold prices have increased the effective tax burden on consumers and tied up working capital for jewellers, even without changes in existing tax rates.

Key GST Rationalisation Proposals

The council's budget recommendations centre around five broad areas, with GST rationalisation forming the cornerstone of their demands. The following table outlines the primary GST-related proposals:

GJC's primary demand involves reducing GST on gold and silver jewellery from the current 3.00% to either 1.25% or a uniform 1.50% across the sector. The council believes this reduction would help offset inflation-led pressures and revive demand in middle-income and rural markets.

Tax Relief and Compliance Measures

The council has proposed several additional tax relief mechanisms to address current market challenges. These include a refund mechanism for accumulated input tax credit on services, or alternatively, a reduction in GST on services such as rent, security and logistics, which currently attract an 18.00% levy. According to GJC, this has resulted in an inverted duty structure for many jewellers.

Other significant proposals include:

• One-year deferral of income tax on unrealised inventory gains arising from gold price appreciation in FY26
• Capital gains tax exemption when hallmarked jewellery is exchanged and reinvested
• Formal clarification on the 5.00% GST rate applicable to jewellery job-work services

GJC Chairman Rajesh Rokde emphasised that "a modest GST reduction, together with relief on notional inventory gains and job-work clarity, will bring millions of transactions back into the formal economy, protect karigar livelihoods, and make jewellery once again an accessible savings asset for Indian households."

Tourism and MSME Support Initiatives

Beyond tax reforms, GJC has called for immediate implementation of the Tourist GST Refund Scheme at major airports to boost jewellery purchases by foreign visitors. The council has also outlined several measures to support MSME jewellers and promote digital adoption:

GJC Vice Chairman Avinash Gupta noted that these steps would support formalisation, digital adoption and consumer trust across the sector. The council believes these measures will strengthen the sector's contribution to the economy while addressing current operational challenges.

Industry Outlook and Government Collaboration

The comprehensive recommendations reflect the jewellery industry's focus on addressing structural challenges while promoting growth and formalisation. The council has emphasised its commitment to working collaboratively with the government to implement these measures effectively. The proposals aim to balance revenue considerations with industry sustainability, particularly given the impact of rising gold prices on market dynamics and consumer behaviour patterns.