By Milind Muchhala, Executive Director, Julius Baer India
India’s finance minister, Nirmala Sitharaman, could be walking a tight rope while presenting this year’s Union Budget. At one end, India is passing through some sort of cyclical slowdown, weighed by a softening domestic demand (amid some macro-prudential tightening of consumer loans by the RBI) and slowdown in government capex (actual capex could be 10-15% lower than the budgeted estimates for FY25), leading to increasing need of some measures by the Government to stimulate growth.
On the other hand, the focus on the path of fiscal consolidation (the Budget may target a fiscal deficit of ~4.5% of GDP for FY26), expected decline in some of the revenue supporters of FY25 (dividend from RBI, tax collection from capital market activities, etc.) and the increasing commitments to the recently announced populist/welfare schemes by the various States could restrict the Government from going too aggressive to revive demand/growth. To make matters worse, the global developments and the weakening of the INR is also constraining the RBI to provide fiscal stimulus.
While the Budget is likely to be fiscally prudent, the Government is likely to stimulate growth by way of incremental reforms, while also providing measures to boost consumption. This could be achieved either by recalibration of the existing tax slabs for direct taxes, or by simplifying/lowering indirect taxes. There could also be initiatives to provide further support to farm income and promote the agri sector, as well as the construction sector, as these remain large employment generators.
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We could also see continuing focus for rural housing, affordable healthcare, renewable energy, promoting domestic manufacturing (possibly through enhanced PLIs, which may also come outside the Budget), and providing increased credit for the MSME segment.
The Budget could focus on promoting the new tax regime through marginal gains to the taxpayers. On the capex front, the Government is likely to fall short of its budgeted capex for FY25, and the budgeted growth for FY26 is also likely to be lower than what we have seen in the past few years (~15% CAGR over past 5 years) amid constrained collections. The Government could also, depending on the measures taken by the Trump administration, come up with measures to protect Indian trade and sectors against the risk of possible higher trade duties by the Trump Government.
Divestments has been one area of disappointment in FY25, and this trend may continue amid weak capital market activity, although some options are available in case the Government becomes keen to target this area for rising some resources.
From the equity market perspective, while there are no major sectoral expectations (as the changes in indirect taxes could be taken up outside the budget), the focus will be on the broader measures to support consumption and investments, as this will have implications for the related sectors. Any major relief for specific sectors in anticipation of tariff changes globally could be positive for those sectors. The other focus areas will remain the Government’s borrowing plans, fiscal deficit targets, and the underlying intent to provide growth stimulus. While the expectations seem to be running low currently, any positive surprises, especially to support domestic demand, could be viewed positively at the margin by the markets.
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