Budget targets 9 sectors to stimulate economic growth

Rupen Rajguru is the Head Equity Investments and Strategy, Julius Baer India

The Union Budget for FY2025-26 was presented amidst a slowing domestic consumption landscape and external sector uncertainties. The focus of this year's budget has been to provide a much-needed booster to consumption and stimulate economic growth through strategic investments. Among the key highlights is a significant taxation relief for the middle class, with income tax exemptions up to Rs 12 lakh under the new regime. This is a bold move, expected to bring Rs 1 lakh crore in revenue losses, but it could play a pivotal role in reviving domestic consumption and boosting consumer demand.

Capex and Fiscal Discipline: A Balanced Approach

Following a period of aggressive capex growth (30% CAGR between FY20 and FY24), there was a slowdown in FY25. The capex growth for FY25, revised downward by 8%, signals a moderation, but the budget for FY26 has estimated a 10% increase, aiming for Rs 11.21 lakh crore in capital expenditure. The government is maintaining its fiscal discipline strategy, projecting a fiscal deficit of 4.4% of GDP for FY26, a reduction from the FY25 RE (Revised Estimates) of 4.8%.

Sector Measures and Impacts

The Budget has targeted various sectors with measures that are expected to stimulate growth and encourage investment.

Related stories

Rupen Rajguru

Head of Equity Investment and Strategy|Julius Baer

• 
  Daily Voice: Government to majorly focus on these 2 areas post general elections, says Rupen Rajguru...
• 
  Daily Voice | Slowing trade in US, China, Europe to affect emerging markets like India, says Rupen R...
• 
  Daily Voice| Stage is set for a gradual fiscal consolidation, says Rupen Rajguru of Julius Baer

BFSI

A notable expansion of the credit guarantee scheme for MSMEs will almost double the limits and lower the premium, benefiting banks and NBFCs. Furthermore, the reduced fiscal deficit will help moderate yields, benefiting corporate-heavy banks and PSU banks. However, the expanded tax regime could negatively impact Life Insurance companies, as Section 80C benefits become redundant.

Infrastructure and Cement

A slight increase in capital expenditure allocation (Rs 11.2 lakh crore, 0.8% over FY25BE-Budget Estimates) will continue to support infrastructure projects, albeit with a neutral to marginally negative impact on capex-dependent sectors such as roads, railways, and defense. The focus on affordable housing through PMAY remains unchanged which is a positive for HFC’s focusing on affordable housing. The extension of the Jal Jeevan Mission will benefit water management and pipe companies.

Consumption and Tourism

The reduction in income tax thresholds will provide a direct benefit to consumers. Additionally, the government's emphasis on tourism, including the development of 50 new tourist destinations and an expanded Udaan scheme, is expected to boost tourism and related sectors. This move is positive for companies in the consumption space, including staples, discretionary, retail, tourism and home improvement.

Auto & Ancillary

The focus on rural consumption, coupled with tax relief and duty exemptions for lithium-ion battery manufacturing, is positive for auto companies, particularly those with a rural or entry-level presence as well as Battery manufacturers.

Energy

The budget also looks to position nuclear energy as a key pillar of India's energy transition, with a target of developing 100 GW of nuclear power by 2047. The solar power grid allocation of INR 100 billion and the JV between NTPC and BHEL for an advanced 800 MW plant offer further growth prospects for the energy sector.

Healthcare

The increased allocation for healthcare, including a 23% rise for the Pradhan Mantri Jan Arogya Yojana and the exemption of 36 life-saving drugs from customs duties, is a positive step for hospitals and pharmaceutical companies. The 'Heal in India' initiative could also position India as a leading medical tourism destination.

Textiles

Measures such as the reduction in customs duties on textile machinery are expected to benefit fabric manufacturers. The increase in BCD on knitted fabrics is a positive for Indian knitted fabric players.

Equity Market Strategy: A Focus on Consumption

From a capital markets perspective, the Union Budget has largely been a non-event, with no major changes in capital market taxation or dividend policies. However, the middle-class tax relief is expected to drive increased consumption, which should support earnings growth in the consumption sector. Following a moderation in earnings growth in FY25, the outlook for FY26 remains optimistic, with expected earnings growth of 12-13%. The sectors that will likely see double-digit earnings growth include industrials, property, banks, two-wheelers, and telecoms.

With the Indian equity markets showing signs of resilience, driven by a recovering earnings cycle, strong domestic liquidity, and the potential return of FPI flows, we remain constructive on the market. However, volatility in H1CY25 may arise due to global uncertainties. We recommend buying into potential dips, focusing on large caps and large mid-caps, which offer more stability compared to smaller companies that may be more vulnerable to liquidity shifts.

Fixed Income Market Strategy: A Neutral Outlook

From a fixed income perspective, the Budget has been neutral, with no significant changes in market borrowing expectations. India's economic growth outlook remains relatively stable, supported by resilient demand, government capex, and recovering private investments. The expectation of a rate cut cycle due to fading inflationary pressures suggests potential upside for bond markets, particularly in the short-to-medium term (1 to 5 years).

Investors can look at categories such as Short Duration Funds, Corporate Bond Funds, Banking & PSU Debt Funds, and Dynamic Bond Funds with a horizon of 12-18 months. For higher-risk investors, longer-duration funds may offer opportunities, though they should be cautious of the potential risks. The outlook remains cautiously positive, and investors should align their portfolios with their risk profiles and market conditions.

The FY2025-26 Union Budget presents a clear path toward consumption-driven growth, supported by strategic sectoral measures, continued fiscal discipline, and targeted investments in infrastructure, energy, and healthcare. While the equity markets may see volatility in the short term, the medium-term outlook remains positive, particularly for sectors benefiting from rural consumption. For fixed income investors, a more selective approach towards short-duration and high-quality corporate bonds will be key in navigating potential market fluctuations.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.