Govt may look to increase capex, domestic consumption to boost growth

"We may see actions [in the Budget] aimed at pushing growth in both the capex and domestic consumption for the middle class," says Ruchit Mehta, Head of Research at SBI Mutual Fund.

The upcoming Budget presents an opportunity to address challenges like food inflation, subdued urban consumption, and sluggish private capital expenditure, notes Gurpreet Sidana, CEO of Religare Broking. “Measures such as reducing import duties on essential food items, improving agricultural supply chains, and investing in cold storage infrastructure could lower input costs and spur consumption, positively impacting sectors such as agriculture, FMCG, and infrastructure,” he says.

There’s some rationale for such optimism. In recent years, the government’s thrust on sectors such as infrastructure, renewable energy, healthcare, and manufacturing has proved beneficial, generating positive momentum and significantly rewarding stocks in this space. For instance, the allocation to the Ministry of New and Renewable Energy surged 153% to Rs 19,100 crore over the past two years, driving growth in the sector. Since the last Union Budget, the benchmark Nifty 50 rallied surged 9.2% to 23,689 with sectors such as defence, consumer durable leading with 49% and 33%, respectively, surge (see chart).

Against this backdrop, let’s examine key sectors that are likely to gain from the upcoming Budget announcements:

Infrastructure

In the past few Budgets, infrastructure development has been a cornerstone of India’s economic strategy. The government allocated a record Rs 2.55 lakh crore to the Ministry of Railways in 2024 Budget compared to Rs 2.43 lakh crore in 2023. Similarly, allocation to the Ministry of Road Transport and Highways also hit an all-time high of Rs 2.78 lakh crore in the Budget 2024, in contrast to less than Rs 1 lakh crore in Budget 2020. The government’s focus provided a fillip to stocks in these sectors. And indices like manufacturing, realty, and infrastructure increased 22%, 20%, and 8%, respectively, since the last Budget. Will this positive momentum continue? Sandip Bansal, Senior Portfolio Manager at ASK Investment Managers, says, "Infrastructure capacity creation has been an important driver of economic growth in the recent past and is likely to remain so... We anticipate that roads, railways, and waterways will continue to receive investments."

In addition, analysts believe that the likely approval of single-window clearance system in the upcoming Budget may help reduce delays in real estate projects, further bolstering infrastructure and realty markets. These developments are expected to increase demand for cement, iron and steel, and other construction materials, thereby enhancing valuations in these segments.

Renewable Energy

India’s commitment to achieving 500 gigawatts (GW) of renewable energy by 2030 is expected to shape the energy sector’s focus in Budget 2025-26. According to Master Capital Services Director Palka Arora Chopra, the government’s commitment could translate into targeted policies, incentives, and subsidies; that would further encourage investments and innovation.

In addition, the volatility in crude oil prices and related commodities is prompting an increased focus on renewable energy. “This focus would benefit companies in solar, wind, and battery manufacturing, positioning them as significant contributors to both economic growth and sustainability,” says Chopra.

Healthcare

After Covid-19, the government has made healthcare a priority in every Union Budget. It is likely to stay that way this year as well. Jain of Reliance Securities says the government may increase public health expenditure to over 2.5% of GDP. The move is expected to support the ongoing efforts to expand health infrastructure, enhance digital services, reduce compliance hurdles, and lower the GST burden for retail and health-focussed products.

The healthcare expenditure of the government has increased to 1.9% of the GDP in FY24 from 1.4% in FY18.

The rise in healthcare expenditure, according to the Federation of Indian Chambers of Commerce and Industry (FICCI), will strengthen healthcare infrastructure, ensure equitable access, and move closer to universal health coverage goals. Additionally, FICCI also recommends raising the tax exemption for preventive health check-ups under Section 80D to Rs 20,000 from the current Rs 5,000. It also proposes doubling the deduction for health insurance premiums to Rs 50,000 under Section 80D and incentivising medical value travel for the healthcare sector to contribute to India’s foreign exchange earnings.

Manufacturing

The manufacturing sector has seen multiple schemes in the recent past, including Make in India. With the government targeting 25% of economic output from this segment over the long term, the country’s industrial policy might broaden in the upcoming Union Budget.

Bansal of ASK Investment Managers, says, “There could be schemes for export-oriented sectors like electronics and textiles in this year’s Budget, as the country looks to boost its share in global trade. India has stiff commitments for carbon-emission reduction, and hence, the renewable energy sector and the energy transition space could get more incentives.”

Defence and housing have also been priorities, and Bansal expects that they will continue receiving higher budgetary support. The government allocation to the Ministry of Defence increased to Rs 6.22 lakh crore in 2024 from Rs 2.85 lakh crore in 2014.

Consumer Goods

In the last quarter, consumer demand, particularly in urban areas, dropped. Motilal Oswal Financial Services cites adverse weather conditions, such as floods and heavy rains in certain areas, along with persistent inflation, as contributing factors. To stimulate urban consumption, Sidana of Religare Broking says the government may introduce targeted tax cuts, increase disposable incomes, and rationalise GST rates on consumer goods, boosting demand and benefiting consumer-orientated industries.

Sidana believes the Budget should address food inflation by lowering import duties on essential food items, optimising agricultural supply chains, and investing in cold storage and transportation infrastructure to reduce waste. These initiatives, if successfully implemented, could have a positive impact on sectors such as agriculture, FMCG, and help improve consumption.

Additionally, the Budget may prioritise addressing bottlenecks through ease-of-doing-business reforms, accelerating project approvals, and expanding the Production-Linked Incentive (PLI) scheme to more sectors, particularly MSMEs, he says. “Such measures could also provide a significant boost to companies in capital goods, infrastructure, cement, and metals.”

Automobiles

India’s automobile market, which is the third largest in the world, is undergoing a major transformation, driven by factors like changing consumer preferences, emerging needs for sustainability, and evolving government policies. The shift will be even faster with Union Road Transport and Highway Minister Nitin Gadkari recently revealing India’s aspiration to become the No. 1 country in the auto segment.

No doubt, the sector has seen some positive changes in recent times. However, certain shortcomings require the attention of policymakers, according to the global consultancy firm Deloitte. For instance, the industry has been grappling with the issues around complex classifications for a long time now. The government could also consider removing the compensation cess for the sale of vehicles.

In a report, Deloitte says the government may also consider reducing GST on hybrid vehicles. “Hybrid vehicles can be considered as one of the closest alternatives to EVs. Promoting the use of hybrid vehicles will help reduce carbon emissions and reduce import dependency on crude oil. Hybrid vehicles can be an intermediate step for consumers who are not entirely ready to transition towards EVs.”

Capital Markets

Industry watchers say the Union Budget 2025-26 should ideally continue the path of simplifying and rationalising taxes on capital market products. Bajaj Broking believes that long-term capital gains tax, which was rationalised at 12.5% in the last Budget, can be reduced further by 50-200 basis points to benefit investors. Similarly, lowering securities transaction tax and simplifying provisions for alternative investment funds will foster institutional investments, improve market liquidity, and attract foreign portfolio participation. "Continuing in the same vein, simplifying tax rules for financial instruments such as bonds, stocks, and derivatives, as well as for foreign portfolio investors (FPIs), would remove complexities and enhance the market’s attractiveness," it says in a note.

In short, the expected focus on these sectors in Budget 2025-26 would not only influence the operational landscape for companies but also positively impact investor sentiment. With robust government support, companies in infrastructure, real estate, healthcare, and renewable energy could see enhanced growth in profitability and market valuations, creating promising opportunities for both domestic and foreign investors.

@iamrahuloberoi