
Capital markets to watch budget balance between fiscal deficit and spending

Summary
- Market participants see clear fiscal targets, capital spending plans, and tax relief to the middle class as key to stimulating growth and sustaining foreign inflows.
India’s market participants will watch the upcoming Union Budget for 2025-26 for proposals to boost consumption while continuing on the patch of fiscal consolidation as the economy grapples with a slowdown.
The prevailing sentiment is that while the market regulator Sebi will manage the rules to curb speculative trading and protect investor interests, the budget should firmly focus on capital expenditure and the potential incentives that may be extended to corporates. Market participants anticipate that the government’s agenda will prioritize enhancing the country’s appeal as an investment destination, creating an environment where investors feel confident and encouraged to deploy capital without hesitation.
The expectations from finance minister Nirmala Sitharaman’s eight budget are centered around potential reforms and fiscal measures that could boost various sectors and maintain India's growth momentum, said Dhiraj Relli, managing director and chief executive officer at HDFC Securities Ltd. “This budget is expected to address key issues such as FDI, fiscal deficit, disinvestment, and energy transition, but also restore investor and public confidence in the government's ability to steer the economy through challenging times."
Also read | India’s fiscal deficit for FY26 expected at 4.4%-4.6% of GDP: Goldman Sachs
The emphasis should be on enhancing public expenditure, reducing fiscal deficit, incentivizing private sector investment, and introducing targeted tax reforms, Relli said.
India is facing a cyclical growth slowdown due to fiscal consolidation and slower credit growth caused by the Reserve Bank of India (RBI) tightening consumer loans. That will bring the spotlight on the pace of fiscal consolidation and the government's spending priorities.
“We think elevated public debt-to-GDP is likely to keep the fiscal consolidation path intact, and we expect the government to target fiscal deficit at 4.4 – 4.6% of the GDP in FY26 (from 4.9% of GDP in FY25). Thus, central government fiscal impulse will remain a drag on growth in the next fiscal year," said a Goldman Sachs report dated 13 January.
Goldman Sachs believes “the fastest growth pace in public capex is behind us" and it expects capex to grow at or below nominal GDP growth rates from hereon. “Overall, there is not much room to boost welfare spending, but we expect the pre-pandemic trends in overall welfare spending to continue."
Also read | India crosses $1 tn cumulative FDI milestone, inflows jump 26% in H1 FY25
Market participants see clear fiscal targets, capital spending plans, and tax relief to the middle class as key to stimulating growth and sustaining foreign inflows.