The standout feature of the recent Indian budget is the overhaul of the new tax regime with a focus on providing tax relief to the middle class. Direct tax cuts and rationalisation of the tax slabs will result in zero tax up to income of Rs.12 lakhs , up from Rs.7 lakhs. This will increase the net savings in the hands of consumers, amounting to approximately Rs.1.4 lakh crore. The backdrop to the budget was weak consumption and this increase in disposable income is a strong fillip to boost consumption and stimulate economic activity.
Additionally, the government has maintained fiscal prudence by controlling borrowing levels. They have set a target to reduce the fiscal deficit to 4.4% of GDP in 2025-26, progressing towards the medium term goal of bringing it below 4.5%. This fiscal discipline is expected to contribute to lower interest rates, further boosting consumption. It is anticipated that the Reserve Bank of India may align the monetary policy by lowering interest rates in their upcoming meeting on February 7 or the next meeting in April 2025. This strategic move and a well-coordinated fiscal and monetary response will further support growth and enhance consumer spending.
There is a visible shift in this budget from public capex driven growth towards supporting consumption. However, broadly, the capex story continues as earlier. The FY 25 revised estimate for infrastructure spending stands at Rs 10.18 lakh crore, falling short of the FY25 budget estimate of Rs 11.1 lakh crore. This is slightly disappointing , and perhaps the elections led to some deferment of capital spending. However the estimates for FY 26 stand at Rs 11.21 lakh crore, further supported by a surprising 45% jump in capital expenditure planned by way of grants to Rs 4.27 lakh crore.
The recent budget is poised to have a positive impact on the economy by enhancing disposable income, boosting consumption, and supporting lower interest rates, all contributing to a more robust economic environment. For the first nine months of FY 25, corporate profit growth was a muted single digit, the multiplier effect of this budget is likely to result in corporate profits again getting into mid teen growth rate from the March quarter onwards. Equity markets being closely intertwined with corporate earnings growth are likely to perform well, as more confidence builds up. Additionally, unlike last time, there is no change in capital gains tax and that is sentimentally positive for the markets.
For medium-term goals (anything above 3 years), allocation to equities should remain on the higher side. Fresh money could be invested in tranches, utilizing the SIP ( systematic investment plan) or STP route (systematic transfer plan). The recent correction in equities over the past few months has resulted in large cap valuations correcting to long term average values. Relative valuation comfort is more for the large cap segment as compared to mid/small caps, however a few highly selected mid/ small stocks could be effective . The budget outcome seems mixed for the sectors-positive for consumption and muted for capex related themes.
Equity mutual fund schemes remain the preferred way to express interest in stocks because of the broad-based market and rapid rotation across sectors and caps. Selection of the right schemes is very important. Fund managers who quickly identify the right sectors and the right proportion of caps (large, mid and small) should be selected. One helpful pointer is the percentage of schemes managed by them that are in the top quartile during the last 2 years. I am recommending schemes which provide flexibility to the fund manager and therefore the categories remain Large caps, Large & Midcap, Multicap, Flexicap, and Focus.
As always, with global and local uncertainty, some part of the portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies. Similarly, for short-term goals, equities, because of their volatile nature, should not be deployed. Equity savings schemes, balanced advantage schemes, or multi-asset funds may be utilized for goals with a time horizon of 2–3 years. Multi-asset funds have been particularly successful in attracting investments into underappreciated areas like debt, commodities , REITs( Real Estate Investment Trusts) and InvITs( Infrastructure Investment Trusts). These help in mitigating risks while capturing opportunities across economic cycles. An additional advantage of these schemes over traditional bank deposits is the much lower equity taxation that these schemes enjoy. Portfolio construction should be sequential in the order of liquidity, safety, and yield-enhancing components.
