With Finance Minister Nirmala Sitharaman presenting the Union Budget on February 1, Elara Securities said that the character of the Union Budget has seen a decisive shift – from capex heavy to balanced, in order to address demand, especially in the urban sector. Garima Kapoor, Economist and Executive Vice President, Elara Securities, said, “While overall capex-to-GDP ratio has been steady at 3.1 per cent in FY26BE (versus FY25RE), there is a shift away from roads and railways to ports, maritime and urban infra. Policy incentivization for the corporate sector in the past six years – corporate tax cuts and production linked incentive scheme – has morphed to consumer-centric focus via incentivizing demand in the economy.”
The shift to debt-GDP ratio, which being a fiscally prudent measure, also provides for much-needed flexibility for the budget, obviating the need for a sharp consolidation hereon, Elara Securities stated, while maintaining that this could open much needed fiscal space in the Budget from FY27.
Staying on fiscal consolidation path paves way for lower interest rate
The Budget over-achieved the fiscal deficit target of FY25 by 10 bps to 4.8 per cent of GDP and targeted FY26 deficit at 4.4 per cent of GDP, staying on the fiscal consolidation path. With growth potential of 10 per cent in mind, Elara Securities said, the government may target a fiscal deficit in each year (through FY27-31) such that central government debt-to-GDP touches around 50 ±1 per cent by March 2031. “Net borrowing was flat in FY25BEFY26BE, creating space for the RBI to ease rates. Monetary policy, liquidity and prudential tightening cycle have turned – expect a 25bps rate cut in the policy meet on 7 February,” said Elara Securities.
Beyond near-term consumption impulse, Budget positive for financials
Nirmala Sitharaman announced measures to boost consumption demand which while benefitting consumer goods plays in the near term, will create a more durable trend for retail credit lenders. About 18 per cent of retail credit customers are from <Rs 0.5 million bracket and of that, 40 per cent avail unsecured credit. “The support to household balance sheets should help limit incremental slippages on unsecured lending portfolios. Also, 20 per cent of the total deposit base is comprised of senior citizens who will now enjoy interest rate exemption up to Rs 0.1 million (Rs 50,000 earlier). Easing the liquidity cycle with ease in flow of deposits should benefit banks and large NBFCs such as Bajaj Finance. Creation of GCCs in tier II cities and support to the MSME sector should prop the base of consumer credit,” Elara Securities stated.
Budget positive for debt market
The Budget offers visibility on policy action, stated the Elara Securities report. “Sluggish spending for most part of the current financial year was being interpreted as lack of proactive policy. Income tax boost, maintenance of capex at 3.1 per cent of GDP and focus on de-regulation and ease of doing business should placate the ‘policy fatigue’ concern. The biggest factors stabilizing the equity markets hereon would be the turn of monetary policy cycle, bottoming of consumption demand and peaking of DXY. We expect India 10-year yield to moderate towards 6.6 per cent by March 2025E and 6.4 per cent by March 2026E,” said Garima Kapoor.
Budget – Key themes
Per Elara Securities said that the Budget focused on six themes for FY26:
1: Support to middle-income tax payers
FY26 Budget marked a decisive change by offering tax breaks to individuals in the income class earning Rs 1.2 million annually. The need to support consumption was evident given growth in the past few quarters, management commentaries by FMCG companies and lingering inflationary pressures stifling demand.
2: Emphasis on deregulations
The government has set into motion reforms in ‘ease of doing business’ by focusing on deregulation in the financial sector. A high-level committee for regulatory reforms will be set up to review all non-financial sector regulations, certifications, licenses and permissions, so as to strengthen trust-based economic governance and take transformational measures to enhance the ‘ease of doing business’, together with the states.
3: Focus on Agriculture
Agriculture was emphasized upon in this year’s budget as rural demand remained subdued amidst high inflation and stress in MFIs/NBFCs and the government retained its focus on propping traction in the rural economy. FY26BE allocation to Agriculture at Rs 41.7 tn (Ministry of Agriculture, Ministry of Fisheries, Animal Husbandry, Department of Fertilisers, Ministry of Jal Shakti, Ministry of Panchayati Raj and Ministry of Tribal Affairs) has been the second highest after FY23 since FY10.
4: Boost to MSMEs and start-ups
Micro, small, and medium enterprises have been a core focus area for the government. The turnover limits for classification of all the MSMEs will be enhanced to 2.5x and 2x respectively. Additionally, the access to credit and credit guarantee cover are to be enhanced: a) for micro and small enterprises, from Rs 50mn to Rs 100mn, leading to an additional credit of Rs 1.5tn in the next five years, b) for start-ups, from Rs 10mn to Rs 20mn, with guarantee fee being moderated to 1% for loans in 27 focus sectors important for Atmanirbhar Bharat and c) for well-run exporter MSMEs, for term loans up to Rs 200mn.
5: Capex composition shifts; focus on Maritime, Shipbuilding, Urban Infra
The traditional ‘capex-focused’ industries such as Defence Services, Railways, and Roads/Transports witnessed 13 per cent and flat growth each, respectively in FY26BE allocation. Ministries related to industries that are focused on maritime activities such as fisheries, Jal Shakti, and Ports grew 157 per cent, 72 per cent and 31 per cent YoY. Clearly,the government is slowly shifting its capex focus from traditional sectors to other sectors with untapped potential and of strategic import.