 "Union Budget 2025-26: Consumption over capex, rise of the middle class")
Budget 2025 Highlights: Heading into the Union Budget 2025-26, there weren't too many expectations of any significant measures. What came as a positive surprise was the reduction in personal tax for the middle class, aimed clearly at increasing the disposable income in the hands of salaried people, thereby benefiting consumption. And there was also some relief that there was no increase in capital gains tax, something that was being watched closely by the markets.
The disappointment came from the lack of 'announcements' for capex in the Budget speech and no increase in outlay for capex projects in roads / railways / defence, something which was prominent in the past few Budgets. Instead of doling out any major fiscal measures for industry, the Government seems to have focused more on 'ease of doing business'.
The Government has continued with its mission to support the rural economy and agriculture by announcing incremental measures to increase penetration of existing schemes, enhancing credit facility to the related sectors and improving productivity and production.
It is encouraging to see the Government's continued commitment to fiscal discipline and bringing down the fiscal deficit (projected at 4.4 per cent of the gross domestic product (GDP) for financial year 2025-26 (FY26), down from 4.8 per cent estimated for FY25), which can potentially also help in improving the country's credit standing internationally. That said, the 4.4 per cent deficit estimate seems a little optimistic as the revenue estimates could get challenged if growth slows down.
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The capex spend budgeted for FY26 is largely unchanged from the previous Budget. Here, it must be noted that the Central Government has already front-loaded the capex spending over the past few years, and it is now looking towards the States to step up their capex efforts, by utilising the transfers from the Centre more productively. Besides, given the overall environment of slowing growth, the Government has considered it prudent to focus on boosting consumption. Equity markets, therefore, expressed disappointment (on Budget Day) for industrial/capex stocks as well as PSU stocks, while rewarding Consumer stocks, which saw a nice jump.
The personal taxation relief for the middle class should be positive for discretionary spend, particularly in autos, jewellery, travel and somewhat in real estate (additional benefit: value of second self-occupied home now to be considered as NIL). Amongst autos, 2-wheelers as well as passenger vehicles stand to benefit with the income tax booster.
There has been focus on improving credit to MSMEs and first-time entrepreneurs. The increase in exemption limit for interest received from bank accounts (from Rs 50,000 to Rs 1,00,00) for senior citizens should aid in somewhat improving deposit mobilisation by banks. The enhancement of foreign direct investment (FDI) limits in the Insurance sector should help provide an exit route to Indian promoters, while also creating more competition from foreign players as well as aiding product development.
From an overall equity market perspective, now that the Union Budget is behind us, focus will shift back to earnings, valuations and global developments (e.g., Trump tariffs). We remain constructive on the equity markets from a one-year perspective (although with modest return expectations), given the possibility that foreign portfolio investors (FPIs) could return to the markets. We expect Consumption, Rural plays, and Building materials to evince interest from investors, with capex/manufacturing taking a bit of backstage due to
the Budget disappointment. Banking valuations (private sector) are attractive and present a medium-term opportunity, although in the near-term the sector is clouded with growth slowdown-related concerns as well as the possibility of slowing NIMs (once the RBI starts cutting rates).
In the broader market, our preference continues to be large-cap and mega-cap stocks, as mid-cap/small-cap stocks could experience volatility due to their higher valuations and also global uncertainties weighing on investor sentiment.
The Union Budget was broadly ‘neutral’ for fixed income markets, with the Government maintaining the fiscal consolidation course and not increasing net market borrowings (which was on expected lines). Now it is for the Reserve Bank of India (RBI) to chart out the future course for fixed income yields, in terms of easing the banking system liquidity, managing the Rupee and carrying out the long-awaited rate cuts (though expected to be shallow: 50-75 bps) this year.
Our outlook for fixed income continues to be positive, with the expectation that yields should head lower over the next one year, as RBI's focus shifts more towards growth and liquidity easing.
Disclaimer: Unmesh Kulkarni is Managing Director and Senior Advisor at Julius Baer India
