Eastspring Investments
Feb 2025 | 5 min read
Summary
The new Indian budget targets a deficit of 4.4% of GDP in FY26 versus 4.8% in FY25, but its overall economic impact is likely to be neutral and slightly positive for low end consumption.
The main change is increases in income thresholds for personal income tax payment that equate to a boost to household income of about 0.3%, focused on low income.
Much of the fall in the deficit will come from increased dividend transfers from the Reserve Bank of India (RBI) and lower expenditures on items such as interest expense. The government also announced a new commission to facilitate business deregulation.
Public debt/GDP was kept on target to fall from 57% of GDP in FY25 to 50% in FY31, which should be positive for India’s credit rating and the long-term trend in debt flows.
Our Chief Economist, Ray Farris, expects the RBI to begin a 75bps rate cutting cycle with a 25bps cut at its Feb 5-7 meeting. India’s economy should begin gaining momentum in H2 this year.
Investment implications
According to Matthew Kok, a fixed income portfolio manager, despite the commitment towards fiscal consolidation, both net and gross IGBs supply will be higher in FY26 versus FY25. Nonetheless the disappointment in borrowing numbers will weigh on sentiment and put some pressure on IGB yields in the near term.
That said, the market should be able to eventually absorb this increased supply with relative ease. The overall demand-supply dynamics should remain balanced if not marginally positive, especially with RBI now turning net buyers of IGBs via their Open Market Operations.
Banks should continue providing strong support on the demand side as well, given that they have been seeing strong and steady deposit growth rates. The conservative fiscal numbers support the case for RBI to begin easing monetary policy, as growth momentum has been moderating. Given the above considerations, we remain bullish on IGBs in the medium term.
Yuan Yiu Tsai, an equity portfolio manager, concurs that the continued focus on fiscal consolidation provides headroom for RBI to improve liquidity and eventually cut rates. In the near term, the budget is expected to favour urban consumption-related stocks over capex-driven ones as the total tax reduction increases disposable income of the middle-income population. The immediate beneficiaries are auto, hospitality and retail stocks.
Any subsequent rerating of these stocks however will have to be sustained by earnings delivery over the next few quarters. As such we prefer stocks with cyclical tailwinds and low earnings expectations. Among the urban consumption stocks, we are most bullish on four-wheelers which are already at the cusp of a cyclical recovery following a muted ~3% industry volume growth in 2024.
At the same time, we do not think that India’s capex story is over. The next leg of growth will be driven by state owned enterprises and private capex. While we have thus far avoided overvalued stocks in the capital goods/industrial sector, we will be keenly monitoring for opportunities if there is a correction.
According to ICICI Prudential Asset Management (‘IPAMC’), the budget offers policy continuity and outlines a roadmap to attain sustainable growth. It incentivizes job creation, supports discretionary incomes and provides a blueprint to navigate through rapidly changing global macroeconomic conditions and business environment. The tax savings will offer a boost to discretionary consumption while real estate investment across micro-markets may benefit from tailwinds. Despite the focus on accelerating consumption, allocations to key capex intensive sectors such as railways and road transportation remain high.
Given this, IPAMC is positive on several sectors. The cement sector, a pure domestic play, for example, will benefit from the budget’s boost for housing which contributes to ~2/3rd cement demand in the country. With cement prices having bottomed out, the cement sector should be able to outperform the expensive industrial names where punchy growth was priced in.
The auto sector, a discretionary consumption play, is another that will benefit from the tax relief granted to the middle class. The financial sector is also expected to benefit as IPAMC anticipates an improvement in the asset quality of lenders.
IPAMC is the Investment Advisor for various India-focused funds managed by Eastspring Investments.
Interesting reads
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