By Aashish P Somaiyaa, Executive Director & CEO at WhiteOak Capital Asset Management
Markets sulked at the budget announcements, market just couldn’t make up its mind about the budget all day because markets are markets, millions of people like you and me and all of us by nature… we want to hear what we want to hear. In the last 3 years investors have made a lot of money in markets especially in cyclical, policy dependent and macro driven sectors like PSUs, Defence, Railways, Infrastructure, Energy, Utilities, Capital Goods etc. And in the recent correction these are the sectors that have lost the most chiefly because they had run ahead of fundamentals but also because in the first 6 months of FY25 the Government significantly under-delivered on capex spend and on a full year basis the revised estimates fall short of the budgeted estimate.
In FY26, the Government plans to invest as much as was originally planned for FY25. Probably markets wanted to hear more big bang announcements in these sectors where a large section of retail investors is romantically involved and have fond memories. But even before the budget came these sectors were down 30% from their peaks and market was already rotating in favour of laggards of recent times like financials, IT, healthcare, chemicals etc. The budget was probably expected to restore the trend, but it “failed” to do so. This is in so far as the market seems to be concerned.
Coming to the budget itself, if the Government has been able to continue the fiscal glide path bringing estimated deficit in FY26 down to 4.4%, if they can maintain capital expenditure support to investment in the economy and provide Rs 1 lakh crore worth of tax concessions to citizens, I am not sure what more the market wanted. Given that economies are complex adaptive systems inherently in perpetual shifting and rebalancing mode, it is but natural that government priorities, as the key economic player cum facilitator of the economy, will change from time to time.
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There have been concerns now for some time on slowing urban consumption and perceived rise in taxation despite growth in incomes not keeping pace. Financial support to weaker sections of society and to women in recent state elections, the announcement of 8th Pay Commission and now leaving more money in the pockets of taxpayers all points towards prioritization of consumption part of the economy in the next year or two. This is not a bad development but when seen in “who moved my cheese” terms it calls for investors to review their portfolios and take cognizance of factor and sector rotation in the markets.
Also read: Budget balances consumer spending boost with fiscal discipline, focus now shifts to RBI
Apart from this, the budget announcement outlined some very welcome steps towards ease of doing business (EODB). For instance, formation of a high-level committee for regulatory reforms to review all kinds of requirements for reporting, permits, licenses required by businesses in the non-finance sectors is a long overdue and if implemented it will make life easier for businesses. Simplification of TDS (tax deducted at source) and TCS (tax collected at source) related rules and de-criminalization of breaches in different areas is also a step in the right direction for EODB.
A new income tax bill to be introduced next week which will reduce the tax code by 50% and make it simpler and easier for everyone to understand and implement is another welcome move. Investing in tourism related initiatives and reforms to boost tourism, expanding the UDAAN scheme, encouraging investment in generation of nuclear energy are all long-term growth drivers. Export promotion mission with targets for every sector and related ministry also has the potential to make our businesses more competitive and lend them right support in the international arena.
Outside of the budget we also need to keep in mind that everything can not be covered in the budget. GST is outside the budget. RBI is working on infusing liquidity and normalizing credit creation ability for banks. There is RBI policy around the corner which will welcome the fiscal prudence of the Government. Given the fact that the world is becoming bilateral as opposed to multi-lateral, a lot of business agenda will get driven by trade agreements in upcoming times with major player like USA which is looking for alternatives to China.
And lastly, not to forget, our problems started not with our markets, the market decline started in October 2024 with “Trump trade” in anticipation of Mr. Trump winning in the USA and a rally in the US dollar, rising US yields and US equity markets causing currency devaluation and foreign portfolio outflows for India and for all emerging markets. Sometime soon, US markets will cool off once the initial AI euphoria is behind us and the dust settles with actual use cases and more grounded assessments come through; the dollar is likely to give up some of its strength allowing the rupee to stabilise, FPI flows will normalise and then this budget will look just great. It is time to get back into the markets, hopefully the worst is behind us.
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