While stock investors are keeping expectations low from the Union Budget 2025, MOFSL believes the FY26 Union Budget holds potential in the current backdrop of downbeat equity market sentiment, weakening consumption impulse and sluggish government capex. The first full-year Budget under Modi 3.0 can potentially be more than a regular annual exercise, the domestic brokerage said.
It explained: "The FY26 budget has higher significance than an annual budget, as it will be the first full-year budget of NDA’s new term. Based on a detailed analysis of NDA’s past two terms, it can be inferred that the government has utilised the first full-year budgets as a platform for signaling structural/strategic policy intent and laying down a blueprint of its journey ahead, rather than only attempting to balance tactical fiscal trade-offs."
MOFSL noted that the budgetary measures of FY15 and FY19 highlighted the long-lasting impact on India’s economy. Early budgets emphasised fiscal consolidation, GST implementation, and infrastructure development, laying the foundation for growth.
Later budgets focused on manufacturing, Aatma-Nirbhar Bharat, corporate tax cuts, and green energy initiatives, driving robust market cap and PAT growth in domestic cyclicals, capital goods, and private banks. PSU banks rebounded strongly through recapitalization, MOFSL said.
The broking firm said the NDA government over the past decade has pivoted from the low-hanging fruit of a ‘consumption push’ to embracing a supply-side reform strategy. It orchestrated landmark reforms, which included GST, digitization, financial inclusion, affordable housing, and sweeping social reform.
Between FY14 and FY24, capex on roads and railways surged 6 times and 8 times. These efforts were amplified by the National Infrastructure Pipeline announced in 2019-20. Cement and Capital Goods sectors benefited, both recording 15 per cent market cap CAGRs (July 2014 to January 2025.
GST, affordable housing initiatives, PLI scheme, and capex focus propelled domestic cyclical sectors. These sectors achieved a 30 per cent PAT CAGR between FY19-FY24, while their market cap reported a robust 20 per cent CAGR over July 2019-Jan 2025, MOFSL said.
"The 2014 and 2015 budgets focused on banking reforms, allocating initial funds for PSU bank recapitalisation. Over time, the government infused Rs 3.1 lakh crore, driving business recovery. Cumulatively, between FY16 and FY20, PSU banks posted a total loss of Rs 1.5 lakh crore. However, between FY21 and FY24, the combined profits reached Rs 3.8 lakh crore. GNPAs for PSBs fell to 3.1 per cent as of September 2024 from 14.6 per cent in FY18. Overall, PSU banks' market cap recorded a 23 per cent CAGR (July 2019–January 2025)," the domestic brokerage said.
According to MOFSL's detailed analysis, historical trends suggest that while immediate market reactions to budgets are rife, the value unlocking from structural reforms seeded in budgets often unfolds over time. It noted that the market expects some relief measures for consumption growth (especially urban), given the weakening consumption trends and soft corporate commentary on the same.
"We believe that the government will focus more on improving household income growth through slab adjustments. Further, indirect taxes on items deemed non-essential consumption may be raised to fund forbearance on items of middle-class consumption. Unlike the past few years, the budget could go easy on LTCG/STCG from equity markets," it said.
MOFSL said its discussions with several investors suggest a prevalent sense of despondency on government capex, after about a 12 per cent YoY dip between April 2024 and November 2024 and limited visibility of on-the-ground pickup in recent months.
"Hence, we believe that any allocation above Rs 11 lakh crore for capex, backed by convincing commentary, could positively surprise the market. Also, after a series of promises for freebies across multiple state elections, market participants are concerned that FM may tilt more towards easy handouts," MOFSL said.
The domestic brokerage said given the current tactical economic weakness, it will not be too surprising if the finance minister Nirmala Sitharaman considers a modest countercyclical fiscal overstretch. FY25 fiscal deficit is likely to be lower at 4.8 per cent against the budgeted 4.9 per cent. This slack may also help to provide some headroom for the FY26 Union Budget, MOFSL said.