Union Budget 2025 impact on stock market likely to be muted, says UBS

UBS India strategist Anubhav Agarwal believes the impact of the Union Budget 2025 on stock market will be muted, as capex and consumption boosts could be limited if the fiscal deficit is to be contained at less than 4.5 per cent of GDP in FY26. If FY26 capex is budgeted at around Rs 11 lakh crore, similar to the FY25 budgeted capex, it would be negative for Larsen & Toubro Ltd (L&T) and core infrastructure companies, the foreign brokerage said today.

"The importance of domestic orders is now higher for these companies given limited overseas opportunities, especially in the Middle East. We think companies exposed to private, emerging infrastructure and power value chains are relatively better placed given private sector capex growth remains in the double-digits," UBS said.

In the note "Modi 3:0: What do we expect from the Union budget?", UBS said stake sales including that of NMDC Steel Ltd, IDBI Bank Ltd, Shipping Corporation and BEML Ltd are likely to be pushed forward in FY26, UBS said while adding that it does not see any changes in tax policy, especially for capital markets, in its base case.

UBS said the focus on capex, consumption and employment with stay but within fiscal boundaries. It expects capex to grow slightly better than nominal GDP at 12-14 per cent YoY, with a focus on roads & highways, railways and defence, supported by a higher transfer of interest free capex loans to states.

"This compares with a weak capex performance in FY25 YTD down 12 per cent YoY and the high growth of FY21-24 of 30 per cent YoY on average. The quality of government spending will improve, in our view, with the share of capex in overall spending improving to 22 per cent in FY26E vs 18 per cent in FY25 YTD and 20 per cent in FY22-24," UBS said.

The foreign brokearge expects some adjustment in income tax for middle-class households, which should help boost disposable income and hence discretionary consumption. It also expects spending as percentage of GDP on welfare schemes to largely stabilise.

It still expects the government to increase allocations to boost job creation and skills, and to expand the production-linked incentive (PLI) scheme to include new sectors in a bid to boost manufacturing, along with other measures.

UBS said given the recent softer domestic growth and elevated global uncertainty, the Union budget to be announced on February 1 is key for investor sentiment and regarding policy measures that prioritise growth.

"In FY25E, we expect the central government's fiscal deficit as a percentage of GDP to slightly improve to 4.8 per cent (against the government's budget estimate of 4.9 per cent), as we forecast slower than budgeted capex (3 per cent of GDP (UBSe) vs 3.4 per cent in FY25BE)," it said.

UBS said the nominal GDP growth for FY25 was revised down to 9.7 per cent YoY from 10.5 per cent YoY and going into next year, it expects the pace of fiscal consolidation to slow down and central government to target a
fiscal deficit of 4.4 per cent of GDP.

"We think the government will assume a higher nominal GDP growth of 10.5 per cent YoY in its base case (vs. 9.8 epr cent YoY UBSe). From FY27E, we expect the government to shift to a new medium-term fiscal consolidation path linked to reductions in central government debt as a percentage of GDP," it said.