Opinion
Union Budget 2025: Govt dials up consumption and walks the fiscal talk
Summary
- A much bigger elbow room to RBI for adopting easier monetary stance is a significant positive from the budget
FY26 budget has brought a big cheer for the middle class with the effective tax burden being reduced to zero for income up to ₹12 lakh per annum. The proposal is likely to put more money in the pockets of urban consumers, fuelling spending on FMCG, consumer durables, automobiles, tourism, etc. Overall allocation towards capital expenditure has also increased–it's important to note here that the base of capital expenditure had gone up significantly with consecutive higher allocation in past four budgets. Through the budget, the government’s intention seems to continue the focus on infrastructure build-up and manufacturing resurgence, and, at the same time, support mass consumption, which is struggling due to inflation and lower income growth in recent times.
Yet again, the government proved that it is walking the talk in terms of fiscal prudence. Fiscal deficit for FY26 is pegged at 4.4%, which is a huge 40 basis-point improvement over FY25 revised estimates. Budget has adjusted the capital spend allocations for the next fiscal based on the revised expenditure. These adjustments helped the budget to go for aggressive consolidation. Fiscal prudence paves the way for easing of monetary policy stance by the Reserve Bank of India (RBI), including rate cut possibility. Economy could have twin engines of growth going forward in the form of consumption and capex supported by tax relief, and possible monetary policy.
Consumption & capex to drive growth
For all consumer companies, particularly those servicing discretionary demand, decent traction can be expected to come back. For a person earning around ₹24 lakh per annum, saving in tax outgo would be significant ₹1.1 lakh (around 4.5% of income). These savings can be channelized into higher spending or higher investments. Small-ticket discretionary businesses like QSR & food delivery, quick commerce and retailers could be the first level direct beneficiaries. The tax relief and rise in disposable income will come handy for the telecom sector as well, which is contemplating another tariff hike, perhaps this year.
Read more: Consumption push: Shop till you drop?
Tourism-related demand, particularly aviation and hospitality, which is anyways going strong, gets further boost. Big-ticket consumer goods like consumer durables, air conditioners, two-wheelers and entry-level four-wheelers, etc. could also be supported through higher disposable incomes and easier availability of credit.
Rationalization of import duties continued in this budget as well with the intention of more value-addition in domestic manufacturing. Basic Customs Duty on interactive flat panel display has been raised to 20% from 10%, while the basic customs duty on parts for manufacturing open cells of TV panels has been cut to nil from 2.5%. The rise in durables consumption aided by such tariff interventions would help various manufacturing companies in India, along with the multiplier effect of generating better quality employment.
The real estate sector is positioned to gain from the budget with two major changes. Previously, taxpayers were only allowed to claim the annual value of one self-occupied property as zero, while any additional properties were taxed based on deemed rental income. The change announced in Budget 2025 allows taxpayers to claim the annual value of two self-occupied properties as zero. This can boost demand for real estate from those who are looking at real estate from an investment point of view. Secondly, threshold for TDS on rent has been raised from ₹2.4 lakh earlier to ₹6 lakh, a move expected to ease the tax burden and simplify rental transactions.
At the macro level, much bigger elbow room to RBI for adopting easier monetary stance is a significant positive from the budget. With fiscal prudence and control over inflation, RBI can go over and tackle the economic slowdown by improving liquidity and, maybe, by cutting rates. Rate cuts would further help the personal consumption and may boost rate sensitive sectors including real estate, non-banking financial companies and housing finance companies.
Infrastructure, industrial and capital goods stocks can see disappointment as under few heads of capital expenditure like railways and roadways, the increase in allocation is negligible. The cement sector, which was hoping for higher infrastructure allocation, can also get disappointed. However, it would be better to wait and evaluate RBI's stance in the forthcoming policy on 7 February for the overall impact. They will stand to benefit if RBI chooses to ignite the sentiment with a rate cut or significant measures to boost liquidity the system.
Read more: Budget 2025 | 100% FDI in insurance a positive for the sector but not for its stocks
For insurance companies, raising the basic exemption limit and rationalized tax slabs would fasten the shift to new tax system and may impact tax rebate-related insurance policy sale. For the wealth and asset management firms, higher disposable incomes within ₹12-50 lakh range could also bring in benefit with more savings available for investments.
The sector rotations in the market would continue with slight realignment of focus to address the consumption slowdown and urban distress. Consumer stocks can see money shifting towards them from the overcrowded and overpriced capital goods and industrials stocks over next few days. Beyond these adjustments, the market focus would again shift back to earnings growth in conjunction with valuations.
Nilesh Shah is MD, Kotak Mahindra AMC
