Budget balances consumer spending boost with fiscal discipline, focus now shifts to RBI

Nilesh Shah is the Manging Director at Kotak Mahindra AMC

The latest Budget has arrived amidst a backdrop of both local and global uncertainties. The economic outlook remains clouded by weakening urban consumer sentiment, slowing credit growth, a delayed rate cut cycle, and uncertainty around government priorities—populism over capital expenditure. Incessant foreign investor selling has further impacted sentiment. In this context, the government’s FY26 Budget ticks the right boxes and strikes a balanced note between putting money in the hands of consumers and following a conservative fiscal path.

Consumption boost

This Budget has focused on reviving consumption while maintaining fiscal stability, crucial for enabling lower interest rates. A significant move is the tax relief for the middle class, expected to boost disposable income and consumer confidence. This change should positively impact spending on aspirational buying, essentials, and discretionary items like dining out, apparel, travel, footwear, home improvement and entertainment. Real wage growth has stagnated over the past five years, making this tax relief even more critical for urban consumption.

In quantitative terms, annual consumption related revenue for BSE500 companies in consumption related sectors is close to Rs 22 lakh crore and on this base the expected saving on account of the tax break is Rs 1 lakh crore or 4.2 percent, which is a reasonable push. Lower interest rates can add another engine to consumption growth. Investments in rural growth too continued with various measures. The revenue numbers in the Budget are very reasonably pivoted around a nominal growth estimate of 10.1 percent in FY26E and assume little from divestments. The thrust on infrastructure development continues albeit at lower place in the Budget with outlay on capital expenditure increasing by 10 percent from revised estimates and holding at 2.9 percent of GDP.

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The Budget showcased the priority the government places on priority with allocations and focus across nuclear, batteries and renewable energy. Defence expenditure has grown by low teens over FY24E. NHAI capex for FY26BE (Budget Estimates) has been kept at Rs 1.88 lakh crore (10.9 percent higher YoY). Roads and highways capex outlay of Rs 2.72 lakh crore for FY26E is flat YoY on FY25RE (Revised Estimates). Railway capital expenditure target for FY26E was Rs 2.65 lakh crore, flat year-on-year on the FY25BE.

Key initiatives

Key initiatives include a push for nuclear energy with plans to add 100 GW by 2047 and efforts to enhance tourism by adding 120 new airports, developing 50 tourist destinations with state partnerships, easing visa norms, enhancing regional connectivity and promoting medical tourism while providing an infrastructure boost to local communities.

Additionally, a Maritime Development Fund aims to support indigenous shipbuilding and related infrastructure. The telecom sector unfortunately did not get any relief on AGR dues. The Budget reflects the government's commitment to improving ease of business and enhancing the PPP framework, which should attract foreign investment over the medium to long term. The aggressive fiscal deficit target allows flexibility for increased spending if specific sectors require attention or incentives.

Also read: FM walks the talk on budget discipline; fiscal deficit target set at 4.4 per cent of GDP for FY 26

The focus now turns to the Reserve Bank of India, which has the tools to drive a positive credit impulse. With tamed inflation, fiscal responsibility, and strong asset quality within the financial system, there's potential for a favourable economic environment. Uncertainties like tariffs remain, but if India capitalises on the China +1 strategy, sectors like electronics, pharmaceuticals, defence, apparel, and toys could see significant growth. Equity market valuations are in line with historical averages, and a positive earnings cycle should sustain investor optimism.

The writer is Managing Director at Kotak Mahindra AMC.

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