By Nimesh Shah, MD & CEO at ICICI, Prudential AMC
Amidst a challenging global environment, marked by elevated geopolitical risks and a rapidly transforming competitive landscape, India’s Budget assumes the crucial task of safeguarding growth and resilience. Over the years, the government has done a commendable job of maintaining macroeconomic stability and fostering growth.
Today, India stands out globally with strong macroeconomic indicators, including a manageable fiscal deficit, a contained current account deficit, a robust financial system and controlled inflation. This solid macroeconomic foundation has ensured that infrastructure and related sectors have performed extremely well over the past few years.
However, the weak link has been sluggish consumption, particularly among middle-class segments. While there was some discussion around rate cuts, the core issue is the slowdown in consumption. The government has rightly addressed this by increasing disposable incomes for citizens at the lower end of the income spectrum.
The exemption of income tax on annual earnings up to Rs 12 lakh is a significant measure aimed at stimulating household spending. Similarly, doubling the tax deduction limit for senior citizens from Rs 50,000 to Rs 1 lakh provides much-needed relief for this group. These timely moves are expected to boost consumer spending and benefit key consumption-driven sectors.
The Budget’s allocations and themes largely reflect consistency and continuity, but the tax cuts provide an important incremental stimulus to revive consumption and support growth. By focusing on these tax reductions, the government has provided the necessary push to the economy at the right moment.
We expect some slippage from the 4.4% fiscal deficit target, potentially reaching 4.7%. However, given the significant fiscal consolidation since 2021, this minor slippage is acceptable, as it provides the stimulus needed to support growth.
Another key highlight is the formalisation of 100% FDI in the insurance sector, demonstrating the government’s commitment to attracting foreign capital. Simplified KYC norms by 2025 will further ease compliance and support financial inclusion.
The Budget also gave GIFT City a boost with tax relief on fund relocations and exemptions on capital gains related to infrastructure investments, encouraging financial activity in this key economic zone.
Equity market outlook
Despite challenges, large-cap stocks have become more reasonably valued after FII-driven sell-offs, while mid and small-caps remain relatively expensive. In this environment, we recommend systematic investment plans (SIPs) in large-cap funds or funds with flexible mandates.
Funds with flexible investment mandate are well-suited for navigating dynamic market conditions because it provides the fund manager with the agility to tactically allocate investments across different market capitalisations, depending on their relative attractiveness.
Asset allocation and multi-asset strategies remain ideal, allowing diversification across asset classes, thereby mitigating risks while capturing opportunities across economic cycles.
Fixed income outlook
On the fixed income side, we expect the RBI to consider rate cuts and liquidity infusion, possibly through another CRR (Cash Reserve Ratio) cut. With fiscal concerns largely addressed and a higher borrowing programme announced, the short end of the yield curve looks particularly attractive.
This Budget is a timely and necessary intervention, prioritising tax relief and boosting disposable incomes to revitalise demand and economic growth. Given the stage of the current economic cycle, the focus on consumption is precisely the support the economy needs to sustain its long-term growth trajectory.
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