India Strategy: FY26 Union Budget: A precursor to long-term policy intent? by Motilal Oswal Financial Services Ltd
* The FY26 budget holds significant importance as it is the first full-year budget of the new NDA term. The government is likely to use this budget to signal long-term strategic policy intentions, rather than just focusing on short-term fiscal adjustments. Historically, first full-year budgets have been used to lay the groundwork for the government's future direction and it is anticipated that measures introduced in this budget could have a lasting impact on the Indian economy.
* Market expectations for this budget are not very high: Market participants have adopted a neutral tone, particularly concerning government capital expenditure (capex). There is some despondency due to a recent year-on-year dip in capex and limited visibility of on-the-ground improvements. Therefore, any capex allocation above INR 11 trillion, accompanied by convincing commentary, could positively surprise the market. Investors are also concerned about the possibility of increased freebies after multiple state elections.
* Focus on empowering Households: Given the current weak consumption trends, the market expects measures to improve household income growth, particularly in urban areas. The government may focus on adjusting income tax slabs to achieve this. It is also possible that indirect taxes on non-essential items could be increased to fund relief on middle-class consumption goods. There may also be some relief on long-term capital gains (LTCG) and short-term capital gains (STCG) taxes from equity markets.
* Potential Fiscal overstretch: Due to the current weak economic conditions, the Finance Minister (FM) might consider a modest counter-cyclical fiscal overstretch. The FY25 fiscal deficit is likely to be lower than budgeted, which could provide some room for the FY26 budget. While the government has generally adhered to fiscal prudence, the current economic weakness may prompt some deviation.
Overall, the FY26 budget is expected to address both immediate economic concerns and outline long-term policy directions. The government may prioritize measures to boost household income and capex, while also maintaining a degree of fiscal responsibility
Over the last decade, the Indian government has shifted its focus from short-term consumption boosts to long-term supply-side reforms, resulting in significant economic and market changes. This approach has emphasized infrastructure development and policy reforms. These reforms have translated into tangible market outcomes, with the market cap of the listed universe surging at a 15% CAGR to INR 302 trillion by Jan’25 from INR 80 trillion in Jul’14. Aggregate Profit After Tax (PAT) also expanded at a 12% CAGR (FY14–FY24), to INR 12.5 trillion from INR 3.9 trillion. Key points of note:
* Infrastructure development has been a key priority, with the FY15 budget emphasizing expenditure on roads and railways. Capex on roads and railways surged approximately 6x and 8x, respectively between FY14 and FY24 reaching INR 2.6 trillion and INR2.4 trillion. This infrastructure push has benefited sectors like cement and capital goods, both recording 15% market cap CAGRs between Jul’14 to Jan’254. The National Infrastructure Pipeline, announced in 2019-20, targeted INR 102 trillion worth of projects over five years, further amplifying these efforts.
* Domestic cyclical sectors have thrived due to sustained reform momentum, the introduction of the Goods and Services Tax (GST), affordable housing initiatives, the Production Linked Incentive (PLI) scheme, and a focus on capex. These sectors achieved a 30% PAT CAGR between FY19-FY24, while their market cap reported a robust 20% CAGR (Jul’19-Jan’25).
·Public Sector Undertaking (PSU) Banks have seen a turnaround as a result of government actions. The 2014 and 2015 budgets focused on banking reforms, allocating initial funds for PSU bank recapitalization. The government infused INR 3.1 trillion, driving business recovery. After cumulative losses of INR 1.5 trillion between FY16 and FY20, PSU banks collectively reached profits of INR 3.8 trillion between FY21 and FY245.
* The trailing price-to-earnings (P/E) ratio for the listed universe has re-rated from 20.6x in Jul’14 to 24.1x currently. Private companies' P/E increased from 22.8x (Jul’14) to 31.1x (Jan’25), while PSUs experienced a de-rating, with P/E falling from 12.8x (Jul’14) to 9.6x (Jan’25)6.
Motilal Oswal Financial Services Ltd. (MOFSL) has identified top investment ideas which include:
* Largecaps: ICICI Bank, SBI, L&T, HCL Tech, M&M, Trent, Bharti Airtel, Titan Company, Sun Pharma, and Dixon Tech.
* Midcaps and Smallcaps: Indian Hotels, Cummins India, BSE, Godrej Properties, Coforge, Metro Brands, IPCA Labs, Angel One, Vinati Organics, and JSW Infrastructure.
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