Union Budget FY26 to focus on fiscal prudence, capital expenditure, says ICICI Securities

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ICICI Securities expects the FY26 Union Budget to prioritise fiscal prudence and strategic spending to reduce the fiscal deficit, shield India from external shocks, and foster sustainable growth. The focus will be on capital expenditure (capex) over revenue expenditure (revex) for income stimulus.

A reduction in election-related spending and improved rabi crop prospects, aided by higher reservoir levels, should help keep subsidies and welfare expenditure under control. This approach is expected to benefit domestic cyclical sectors, the brokerage said.

The need for a tight budget stems from recent downgrades to FY25 GDP growth forecasts, posing risks to the economy. Additionally, Donald Trump’s inward-focused trade policies in CY25 may disrupt global trade and challenge India’s export growth, according to ICICI Securities.

The brokerage house said India's twin deficits and inflation are under control, with the fiscal deficit projected to fall to 4.9 percent and the current account deficit around 1 percent in FY25, but external risks are rising. Donald Trump’s inflationary policies have driven the US 10-year bond yield up by 100bps to 4.6 percent since September 2024, while the dollar index rose 8 percent, affecting the INR less than its peers.

The US Fed’s higher inflation forecast for CY25, combined with high bond yields, may limit the RBI’s room for rate cuts. India’s inflation was 5.5 percent in November 2024. Trump’s tariffs and stricter immigration policies could slow global trade, impacting Indian exports and fueling inflation. India’s trade deficit widened to USD 38 billion in November, largely due to gold imports, and Q2FY25 GDP growth slowed to 5.4%. These external factors pose risks to growth, inflation, and twin deficits, it said.