Union Budget 2026 From Defence To Auto Sector - Morgan Stanley Lists Out Key Reforms Required

Amid rising geo-political risks and tariff induced pressure, Finance Minister Nirmala Sitharaman is set to present her ninth consecutive Union Budget on February 1, 2026.

After Moody's projected India's economy to grow at 7.3% in FY26, Morgan Stanley forecasted the government's fiscal deficit at 4.4% in FY27 as against 4.4% in FY26 announced by Sitharaman in the union budget.

The south Asian nation's fiscal deficit during April-October last year stood at Rs 8.25 trillion, or 52.6% of the 2025-26 budget target, as per the latest data released by the Controller General of Accounts, higher from Rs 7.51 trillion, or 46.5% of the estimate, in the same period last year.

Meanwhile, sectoral expectations ranging from auto to defence are on the rise. Investment banking major Morgan Stanley weighs in on the thematic premise of the upcoming union budget.  

1.  Focus on social and physical infrastructure expansion
2.  Improving ease of doing business to propel private investments
3.  Focus on creating productive jobs alongside skilling of the labour force
4.  Increasing manufacturing capabilities
5.  Improving ease of living

Key Industry-Wise Expectations From Union Budget FY26

Automobile: Key expectations for the automobile sector include higher budgetary support for electric vehicle (EV) infrastructure and greater clarity on schemes aimed at promoting domestic manufacturing of sintered rare earth permanent magnets.

Real Estate: The centre could allow deductions for interest paid on home loans for self-occupied properties under the revised income tax regime. Currently, no such deduction is available, while the old tax regime allows an annual deduction of up to Rs 2 lakh. The move could significantly improve housing demand.

The analysts also noted the requirement to revive mid-income and affordable housing demand by reintroducing the Credit Linked Subsidy Scheme (CLSS) on home loans, offering subsidies of 3–4% of the loan amount. Additionally, they expect the affordable housing price cap to be altered upwards to Rs 75 lakh from the current Rs 45 lakh to reflect rising construction and land costs.

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Hotels: Morgan Stanley expects pan-India inclusion of the hotel industry in the infrastructure sector, which will help lower the cost of debt.

Financials: For the financial sector, the analysts highlight the need for incentives to promote digital payments, harmonisation of tax treatment on interest income across deposit categories, and expansion of credit guarantee schemes for MSMEs and MFIs. Other expectations include enhanced budgetary allocation and simplified processes for availing interest subsidies under PMAY 2.0, along with raising the tax rate for life insurers to normal corporate levels.

Energy and Chemicals: Morgan Stanley sees the possibility of a Rs 2 per litre increase in fuel taxes in Budget 2026.

Metals and Cement: Outlays for cement- and steel-intensive sectors will be a key area to watch amid the government’s infrastructure push. The analysts expect higher allocations toward affordable housing under PMAY, along with policy measures or spending aimed at critical minerals and rare earth elements.

Consumer: Analysts expect general measures in the Budget 2026 to revive consumption.

Telecom: In this vertical, Morgan Stanley expects relief on Universal Service Obligation Fund (USOF) charges until the existing corpus is exhausted. Other anticipated measures include a reform package related to adjusted gross revenue (AGR) dues, exemption of service tax on incremental licence fees and spectrum usage charges arising from the Supreme Court’s AGR ruling, and a reduction in overall licence fees.

The analysts also expect an extension of the carry-forward period for business losses from eight years to 16 years. Support for data centre developers could include conditional tax holidays linked to capacity or green energy targets, customs duty waivers on imported equipment such as GPUs, or higher GST input tax credits.

Defence:   The growth range expectations fall between 12% - 15% with industry players awaiting allocation for local and private defence companies.

Energy Generation: The centre's emphasis on clean energy sources since the previous fiscal year's budget reiterates emphasis on  Bharat Energy Storage System (BESS) adoption, nuclear (including small modular reactors), and pumped storage projects.