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According to smallcase managers, Union Budget may not comfort markets immediately, but it reinforces India’s strategic roadmap at a time of global uncertainty. For investors, the phase ahead demands realism, discipline and a longer time horizon, qualities that often define the most durable returns.

They note that despite earnings recovery taking time, the Budget strengthens medium-term visibility for sectors aligned with public capex and policy priorities. While markets have reacted sharply to selective measures, including changes in derivatives taxation, managers believe the Budget’s deeper signals point to continuity in capital formation, strategic manufacturing and defence-led expansion.

In an insightful virtual webinar titled Decoding Budget ‘26, the smallcase managers noted that Indian markets are undergoing a necessary phase of adjustment as global uncertainty, earnings moderation and policy recalibration converge. They believe that while near-term sentiment remains fragile, the Union Budget 2026–27 reinforces India’s long-term strategic direction, centred on capital formation, domestic capability building and economic self-reliance.

Reflecting on recent market volatility, Divam Sharma, smallcase Manager and CEO & Co-Founder of Green Portfolio said, “Investors are experiencing something many have not seen before. For a large section of investors, this is the first prolonged phase of weak earnings and subdued sentiment. Indian markets are no longer in an ultra-high growth phase. Nominal GDP growth has settled closer to 10%, which is a sign of maturity—not stress.”

He added that valuation resets and drawdowns, especially in smallcaps, are consistent with historical market behaviour and should be viewed as part of a longer wealth-creation cycle rather than a breakdown of the India story.

According to Sanjit Singh, smallcase Manager and Managing Partner & Principal Officer at Modulor Advisory Services, “The immediate market reaction to the Budget has been overly headline-driven. The focus has largely been on the STT hike and the absence of direct tax relief. But the real signals are embedded in the Budget document—policy continuity, withdrawal of customs duties on manufactured goods, and a clear shift towards strategic sectors like defence, semiconductors, rare earths and manufacturing.”

He noted that the government appears comfortable trading short-term popularity for long-term economic outcomes, while maintaining fiscal discipline and reworking social spending through Centre–State participation.

Speaking on sectoral priorities, Shashank Udupa, smallcase Manager and SEBI-registered Research Analyst said, “Budget allocations point to intent, not optics. The sharp increase in defence capital outlay—across land systems, aircraft, engines, heavy vehicles and R&D—clearly shows this is not a one-year push. It’s about building capability, ecosystems and domestic scale.”

He also pointed to higher spending on pharmaceuticals, biopharma research, chemical parks and coal gasification as evidence that the government is addressing both innovation and energy security.

Global Stress Makes India More Relevant

The speakers pointed out that global capital is being reshaped by big shifts such as de-dollarisation, rising resource nationalism and companies rethinking their supply chains. In this changing environment, India’s push towards self-reliance—through defence indigenisation, semiconductor manufacturing and stronger logistics infrastructure—puts it in a strong position as investors look to diversify away from over-dependence on any single country.

They also noted that the renewed interest in gold, shortages in critical metals and persistent commodity inflation suggest the world is entering a new structural phase, rather than just another short-term market cycle.

View on India–US trade deal

The managers noted that the recently announced India–US trade agreement marks a positive development for India. A reduction in trade-related uncertainty could also aid the return of foreign capital flows, also in lending greater stability to the rupee. More importantly, the agreement appears to bring a positive shift in sentiment. While further details are awaited, the managers believe that key sectors likely to benefit the most will include oil and gas, clean technology, nuclear energy, rare earths, data centres and artificial intelligence.

Investment Themes: What Budget Allocation signals

According to smallcase managers, the Budget sends a clear signal on where the government wants capacity and growth to come from over the next few years. Higher spending on defence, manufacturing and energy reflects a push to build domestic capability rather than chase short-term growth. Defence allocations are broad-based, spanning equipment, vehicles, aircraft, engines and R&D, reinforcing the focus on indigenisation and long-term ecosystem development.

Manufacturing support extends beyond final products to building depth at the component level, with increased allocations for semiconductors, electronics, bio-pharma, chemicals, rare earths, construction equipment and textiles. In energy, the government has taken a balanced approach—stepping up investment in renewables, rooftop solar and nuclear power, while also strengthening energy security through coal gasification.

Infrastructure remains a steady pillar, with continued focus on ports, waterways and logistics, supporting demand for commercial vehicles, shipbuilding and capital goods. Together, these allocations improve medium-term earnings visibility across capex-linked sectors and translate into actionable opportunities in defence ecosystems, manufacturing-linked businesses, logistics, select auto and ancillaries, energy transition themes and innovation-led pharmaceuticals.

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