What to Expect from Union Budget?

What to Expect from Union Budget?

31 Jan 2025 02:46 AM
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Union Budget 2025: Market Expectations and Implications

The Union Budget 2025 is around the corner, and stock market participants are keenly watching for policy directions that could shape the economic landscape. With global uncertainties, inflationary pressures, and geopolitical risks weighing on markets, investors are looking for signals of stability, growth, and sectoral boosts. Here’s a deep dive into what the Budget might have in store and how it could impact Indian equities.

Infrastructure Push and Capex Momentum

One of the biggest drivers for the market in recent years has been the government’s focus on capital expenditure. With capex growing by 28.4% in FY24 and expected to rise another 17% in FY25, infrastructure-related stocks, especially in construction, cement, and engineering sectors, could witness continued momentum. Any announcements on expanding multi-modal logistics, digital infrastructure, and urban development could further boost investor sentiment in these areas.

However, the lower-than-expected capex execution in the first half of FY25 (37.3% of the full-year budget compared to 49% last year) raises concerns. If the government fails to ramp up spending, infrastructure-related stocks may see a pullback in valuations. Investors should watch for announcements on new infrastructure spending programs and execution timelines.

Manufacturing and Export Incentives

With the US elections potentially altering global trade policies and India aiming for a $2 trillion export target by 2030, incentives for domestic manufacturing and export promotion will be in focus. Tariff rationalization, duty exemptions, and PLI (Production Linked Incentive) scheme expansions are likely. Sectors such as electronics, semiconductors, pharmaceuticals, and auto components could see an upside if favorable policies are announced.

The extension of the 15% concessional tax rate for new manufacturing companies would be a major boost for industrial stocks. Additionally, the government’s focus on strengthening global supply chains could support mid-cap manufacturing companies poised to benefit from India’s growing role in global trade.

Financial Services and Credit Growth

Despite rising interest rates, credit growth in India has remained strong, particularly for MSMEs, which saw a 13.4% growth in micro and small enterprises and 20.5% in medium enterprises in Q2 FY25. If the Budget announces additional credit guarantee schemes or interest subvention programs, NBFCs (Non-Banking Financial Companies) and banks catering to this segment could see stock price appreciation.

Additionally, with declining NPAs and well-capitalized banks, further easing of regulatory norms or tax incentives for banking consolidation could provide a tailwind for banking stocks. However, any increase in banking sector taxation or additional regulatory burdens may weigh on investor sentiment.

Technology and Digital Infrastructure

India’s digital economy is rapidly expanding, with IT and business services exports surging by 21.3% year-over-year in FY25. Budgetary allocations for AI, blockchain, and cloud infrastructure could drive further growth in IT stocks. If the government extends tax incentives for R&D or introduces policies favoring software product development, mid-cap IT stocks could see renewed investor interest.

Similarly, companies in fintech, cybersecurity, and e-commerce stand to gain from policies enhancing digital payments, data localization, and cyber resilience. Any push toward 5G rollout and smart cities will also benefit telecom and tech infrastructure companies.

Real Estate and Affordable Housing

The real estate sector has been a strong performer, benefiting from urbanization and rising disposable incomes. Investors will watch for tax breaks on home loans, incentives for affordable housing, and GST rationalization on under-construction properties. If the Budget announces policies to ease land acquisition or simplify property taxation, real estate stocks could extend their rally.

A focus on rental housing and the expansion of the Pradhan Mantri Awas Yojana (PMAY) would particularly benefit mid-tier developers catering to affordable and mid-income housing segments.

Personal and Corporate Taxation Outlook

The taxation aspect of the Budget remains a crucial focus for both individual taxpayers and corporate entities. Here are some key expectations:

  • Direct Tax: Investors anticipate clarity on capital gains taxation, particularly the possibility of a uniform tax structure for different asset classes. Rationalization of capital gains tax rates, if announced, could impact long-term investment strategies.
  • Personal Taxation: While a major overhaul is unlikely, simplification of tax slabs, relief for salaried taxpayers, or increased deductions under Section 80C could spur discretionary spending, benefiting consumer-driven sectors.
  • Indirect Tax: Import duty reductions on raw materials for manufacturing could lower costs for domestic industries, impacting sectors like auto, textiles, and specialty chemicals positively.

Highlights of Expectations from the Budget:

  • On the capital expenditure front, it is very likely now that the government will miss its FY25 capex target by about Rs 1 lakh crore.
  • Total spending is also anticipated to be lower than this year’s target, while total receipts are likely to meet the budget estimates.
  • Therefore, the central government would most probably overachieve its fiscal deficit target this year reaching 4.8% of GDP, lower than the 4.9% budgeted for FY25
  • We expect that the government would continue on the path of fiscal consolidation and target a deficit of 4.5% of GDP in FY26.
  • Despite that we expect 10-15% growth in capex to Rs 11.1 lakh crore.

Some of the other expectations from the budget includes:

  • Simplifying GST and removing double taxation on dividend income will ease the tax burden and encourage investment.
  • Investing in rural employment, agriculture, and micro-enterprises, the government would aim to stimulate sustained demand in rural areas, supporting balanced economic growth.
  • The government could also focus on manufacturing by focusing on making India as an export hub through initiatives like Make in India and several PLI schemes.
  • We expect the government to boost consumption by bringing few tax changes to support low-income individuals, employment schemes, or investment allowances.

Conclusion: A Budget for Stability and Growth?

With global headwinds and domestic economic ambitions in play, the Union Budget 2025 will likely aim to balance fiscal consolidation with growth. Investors should brace for potential market volatility around the Budget announcement but also look for structural reforms that could create long-term value.

Sectors such as infrastructure, manufacturing, banking, IT, and real estate stand to benefit the most if the right policies are introduced. However, unexpected tax hikes or regulatory burdens could dampen sentiment. As always, a well-diversified approach remains key for investors navigating Budget-driven market fluctuations.

Overall, the government would have to manage a fine balance between growth and fiscal discipline.

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