India Budget FY 2025-26 | Addresses the Most Pressing Issues

• The budget aims to balance economic growth by increasing disposable income for consumers. With the increase in tax slabs and other indirect measures, it is anticipated that the consumption stimulus will amount to approximately INR 1.0 trillion. ·
• After a significant CAGR of 25% in overall capital expenditure over the past five years, the growth in capital expenditure is expected to decelerate to 10% in FY26. Overall, the budget is neutral for the equity market, but it necessitates sector rotation. ·
• We expect the Reserve Bank of India (RBI) to view this budget positively as the government adheres to the fiscal consolidation path. With the anticipated decline in food inflation , there is now more room to stimulate growth through monetary policy easing. ·
• In the near term, we expect the bond market to react slightly negatively due to the raised market borrowing targets. However, with the RBI's easing monetary stance and fiscal consolidation , yields should remain well-anchored in the medium term. ·

Budget assumptions are credible

The nominal GDP growth is projected to be 10.1% in FY26, while overall tax growth is expected to be 10.8%, driven by a 14.4% increase in personal income taxes despite the income tax cuts. These projections seem reasonable given the enhanced tax buoyancy, which is reflected in the improved tax-to-GDP ratio expected to be 12% of GDP in FY26, compared to 10% in FY20. Year-to-date, personal income taxes have been growing at over 20%, with overall tax collection exceeding expectations.

Figure 1: Gross tax to GDP ratio

Note: BE - budget estimates; RE - revised estimates, Source: Budget documents

Capex growth has moderated, but the quality of spending continues to improve

After a 25% CAGR between FY20 and FY25RE, the government's capex growth for FY26 B.E. has been moderated to 10% year-on-year. The quality of spending has seen a marked improvement over the years, with capex to expenditure improving to 3.1% of GDP in FY26 from 2.2% of GDP in FY21. On the other hand, subsidies as a proportion of GDP have declined to 1.1% compared to 3.6% in FY21.

India Budget FY 2025-26 | Addresses the Most Pressing Issues

Fiscal prudence to improve headroom for the RBI

The government remains committed to fiscal consolidation, with the FY25 fiscal deficit revised down to 4.8% of GDP versus budget estimates of 4.9%. Furthermore, the FY26 fiscal deficit is budgeted at 4.4%, which represents a 10 basis points faster consolidation compared to the target projected in the Fiscal Responsibility and Budget Management (FRBM) Act. This accelerated consolidation is commendable at a time when major economies are struggling to reduce deficits following the surge in COVID-related spending (see figure 4).



Source: IMF (2029 are IMF estimates)

Yields to remain well anchored

Bond yields may experience a minor uptick due to higher gross borrowing targets, but they should remain well-anchored given the continued focus on fiscal consolidation. Fiscal discipline could potentially create room for the Reserve Bank of India (RBI) to cut rates in the first half of 2025, especially as food inflation is expected to decrease with better agricultural output.

Source: Bloomberg

Budget Warrants Sector Rotation

The budget reveals the government's limitations on capital expenditure (capex) spending, which was viewed marginally negatively by the market as the capex spending outlay for the current year was reduced. However, the unexpected increase in tax slabs without affecting the fiscal consolidation path was positively received by the market. Overall, we expect the budget to be largely neutral to positive for equity markets. In our view, some sector rotation is warranted. Investment and capex-led sectors may take a backseat, while consumption-related stocks could see some buying support in the near to medium term. The anticipated implementation of the 8th Pay Commission from next year, along with good agricultural production, can provide much-needed consumption growth support for the economy.

India Budget FY 2025-26 | Addresses the Most Pressing Issues

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