OPINION: Union Budget must spell out measures to strengthen corporate earnings growth, vital to bringing back FPIs and re-energizing the market

Union Budget Expectations

• Union Budget must spell out measures to strengthen corporate earnings growth
• Budget must finely balance between fiscal consolidation and capital expenditure
• Market expects favourable tax regime and stimulus to enhance India Inc’s export competitiveness and manufacturing prowess

Did our AI summary help?

Union Finance Minister Nirmala Sitharaman’s Budget FY27 comes at a time when external factors weigh heavily on the economy than domestic challenges.

The most significant external challenge is the US-imposed tariffs on Indian exports. India’s repeated attempts to sign a comprehensive trade treaty with the US have reached nowhere. The additional punitive tariff of 25% is still in force. It appears that there is no visible progress in the trade negotiations, so far, due to many unresolved market-access issues. This acts as a major drag on the economy as the US accounts for one-fifth of India’s total merchandise exports. It also foments trouble for the economy in myriad ways like rupee depreciation, capital flight (FPI selloff and decline in FDI), revenue loss, dip in forex reserves, weakening of balance of payment system, loss of labour and production, stagnant exports, and many more.

The domestic market has priced in the global uncertainty, which is continuing ever since Russia’s Ukraine invasion, Israel-Palestine conflicts, simmering US-Iran tensions and the latest US–Europe standoff over Greenland. It seems the market has also priced in the near-impossibility of the trade deal in the near-to-medium term due to the US president’s love-hate relationship with India. However, the investors expect a clear fiscal roadmap from the Budget on how to proceed from here.

The Budget must also spell out measures to strengthen corporate earnings growth, which are vital in bringing back FPIs and re-energize market. For some time, valuation in the domestic market has been high compared to other emerging markets and that’s why the FPIs were continuously selling here and buying in other lucrative markets. The only way to justify this higher valuation is a handsome growth in corporate earnings, which will embolden FPI comeback.

At this juncture, adhering to fiscal glide path would be difficult for the FM. Probably, it may hover around the current level of 4.4% of the GDP. Or the government may turn its focus on the ‘debt-to-GDP’ indicator, rather than a fixed deficit target, to maintain its fiscal headroom. Fiscal consolidation is important for managing currency and fiscal stability, and crowding in private investment.

But it must be noted that aggressive tightening will adversely affect public spending and long-term growth. Also, the current fiscal year’s record capital expenditure of Rs 11.21 lakh crore has failed to enthuse private capital expenditure. It shows a deep malaise, signifying an inherent weakness in domestic demand and consumption. Thus, the Budget must finely balance between fiscal consolidation and capital expenditure.

Nobody is expecting tax sops this time. Instead, the market expects a favourable tax regime and stimulus to enhance India Inc’s export competitiveness and manufacturing prowess. However, the restructuring of GST rates, reduction in personal income tax, and special export assistance have led to a fall in the government’s tax revenue, which makes the Budget management even more challenging. To compensate this, the FM has to rely on non-tax revenues such as PSU dividends, disinvestment, RBI dividends, and auction of natural resources.

On growth front, the picture is brighter. India is one of the fastest-growing emerging economies in the world. In the current fiscal year, economy is estimated to grow above 7% despite these hurdles. Shifting global power balances and strategic requirements will force the FM to allocate more funds to defence sector. The big positive is that private defence manufacturers are set to gain from it.

We can expect more liberalization from the Budget, especially in the banking, financial services and insurance sectors as it is essential for lifting market sentiments and India’s global ambitions. Finally, the Budget’s focus would be on enhancing growth, reviving consumption and stimulating economy against the backdrop of a challenging and pessimistic global order.