By Swati Khemani, Founder of Carnelian Asset Management & Advisors
As India approaches the unveiling of the Union Budget 2025, the anticipation and speculations are high. Everyone is going to observe the moves of the finance minister (FM), who faces the challenging task of balancing socialist and capitalist priorities in a dynamic economic environment. With India’s economy at an inflection point, the decision to slightly increase the fiscal deficit could be strategic.
We do not believe that FM choosing for a higher fiscal deficit target for FY26 will be seen as a major negative by markets if the measures taken point towards economic growth revival. This perspective underscores a broader tolerance for fiscal expansion if it contributes effectively to economic revitalization. Strong GST and direct tax revenues might provide some leeway, yet the balance between populist measures and capital expenditure will be decisive. The choice between stimulating consumer demand through populist reliefs and continuing infrastructure investment will reveal the government's strategic priorities for sustainable growth.
The government’s commitment to a 4.5% fiscal deficit in FY26 will be under scrutiny. Amid concerns of economic and earnings slowdown, there is speculation that the government might boost public expenditure. Potential measures like rationalizing income tax rates or providing more disposable income to the public could stimulate consumption. The timing of government capital expenditures, especially if accelerated in the second half of FY25, could also play a crucial role in economic recovery.
Post-budget, the RBI’s policy meeting in February will be pivotal. It will be critical to see how the new RBI Governor and the monetary policy framework respond to the budgetary decisions. This meeting will likely set the tone for monetary policy and fiscal management for the year, with implications for inflation targeting and economic growth. As India stands at this economic crossroads, the Union Budget 2025 will be more than a fiscal manifesto; it will be a blueprint for navigating the complexities of a post-pandemic recovery in a geopolitically tense environment. The measures introduced will need to not only address immediate economic concerns but also set the foundation for sustained growth in the coming years.
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Talking from the markets perspective, sentiment for 2025 is cautiously optimistic. Despite challenges such as tight liquidity, potential slowdowns in earnings, and an elevated supply of equity paper, the structural fundamentals of the Indian economy remain solid. This resilience suggests that while short-term fluctuations are expected, the long-term outlook is promising.
On the currency front, the INR has seen depreciation against the USD, influenced by global economic policies and geopolitical shifts. This trend may continue, albeit the extent of such movement remains uncertain. The current market correction has opened attractive investment opportunities. Sectors like Manufacturing, IT, Pharma, and Banking, despite recent underperformance, present favourable risk-reward profiles. Strategic additions to these sectors could position investors well for when market conditions stabilize.
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