By Saurabh Jain
The FY2025 Union Budget delivered a prudent balance between fiscal consolidation and supporting growth over the medium term as the Government:
Maintained fiscal prudence:
The Government revised lower its FY 2025 budget deficit to 4.9% of GDP compared to 5.1% in the interim budget, while maintaining the gross borrowing plan at INR 14 trillion. The Government reiterated its commitment to the fiscal consolidation path by targeting to bring down the fiscal deficit to 4.5% by FY 2026 and lowering government debt over the medium term.
Continued focus on investment-led growth:
The capital expenditure for FY 2025 was retained at INR 11.1 trillion (about 3.4% of GDP) with a higher outlay to support infrastructure, railways, housing for all, and transition to renewable energy. The budget maintained its policy impetus on enabling the manufacturing ecosystem.
Rationalised taxation:
The budget made changes in taxes to benefit low-income individuals, foreign corporate entities, and angel investors. Capital gains were standardised across asset classes, with LTCG raised to 12.5% from 10% earlier; and STCG raised to 20% vs 15%. Indexation benefit was withdrawn from all asset classes.
Announced an increase in social welfare spending largely directed towards youth, women, MSMEs, and agriculture.
The budget is supportive of India’s superior growth-inflation dynamics. The focus on investment-led growth through higher capex outlays, proposed stimulus for the rural economy and agriculture while sticking to the path of fiscal consolidation, is likely to support a broad-basing of GDP growth in the near term.
On asset class impact, the increase in capital-gains tax may possibly dampen equity sentiment in the near term, though we expect it to have a very limited impact over-medium-term as investors make a prudent investment choice based on an asset’s risk-reward rather than favourable tax treatment of gains. Further, the removal of indexation benefits while calculating capital gains taxation on non-financial assets is likely to drive formalisation of savings and make financial assets more attractive.
Our View on Asset Allocation:
We believe a diversified asset allocation remains a prudent strategy to tide through the near-term volatility. Within equities, we are overweight (OW) large-cap equities over mid-cap and small-cap equities, given a greater margin of safety on both valuations and earnings. The sustained focus on investments in the budget is supportive of our preference for investment sectors – manufacturing and infrastructure. Within sectors, we prefer a barbell approach through an OW on domestic cyclicals (Industrials and Financials), which we balance through an OW on Consumer Staples that is likely to benefit from a boost in agriculture and rural incomes.
The government sticking to the path of fiscal consolidation is positive for fixed income and likely to support lower bond yields over the next 12 months, given improving demand-supply dynamics for onshore bonds on lower government borrowing and steady inflows from index-tracking foreign funds. We find a favourable risk-reward in medium-and-long-maturity bonds given the still attractive ‘carry’ or yields and the potential for higher price gains as yields decline.
(Author Saurabh Jain is the head of Wealth Solutions at Standard Chartered Bank, India)
