The Narendra Modi government’s interim Budget 2019 is slightly negative as it has opted to pause fiscal consolidation, increasing spending ahead of the general elections, said Morgan Stanley in a research note, adding that the Budget will support consumption and contain macro stability concerns.

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The BJP government's last Budget for the current term offers cash benefits to more than 150 million families of the country, with direct income transfer to farmers and tax rebates to middle-income tax-paying families in the coming months, Morgan Stanley said, adding these budget proposals may affect the ruling party’s chances in the forthcoming elections.

According to MS economists, the government is too optimistic about the revenue collection and the farm support is higher than their expectation. “The implied revenue assumptions for Dec-March FY19 indicate ambitious projections mainly on tax collections, which imply that the actual deficit could be higher than 3.4 percent of GDP,” MS analysts noted.

The gross issuance will increase to Rs 7 trillion, the highest in the past few years, on the back of high redemptions in FY20. “Previously, when the government faced such high redemptions, it would buy back the debt to smooth the supply pressure. Hence, it remains to be seen if the buyback would happen in FY2020.”

Beyond the budget, Morgan Stanley expects the market to trade based on the fundamentals. “Heightened populism in the election campaign could spook bonds and equities from time to time in the coming three month. Our view is that there is a 75 percent chance the election season will not result in outsized market moves as seen in 2004 and 2009,” it said.