Much of what is material to markets today is outside the scope of the budget. The Budget is no longer the all-encompassing policy event it once was. Major reforms in indirect taxes have already been introduced through GST. Similarly, adjustments to tariffs and customs duties are increasingly addressed through free trade agreements (FTAs), rather than through the annual budget process.As a result, the budget has been gradually reduced to a largely procedural exercise focused more on reporting the government’s financial status and preparing projections for the following year. In this sense, the budget exercise has increasingly become a ritual and not something material.
Even structural reforms have been unveiled beyond the scope of the budget. Take, for example, a slew of reform measures announced in the last few months, starting from GST 2.0 to the Insurance Act, to opening up the nuclear space to the private sector, etc. That said, the government may reserve some crucial reform measures like the Electricity Act or the IBC renewal, etc. as part of the Budget announcements to boost sentiments.
While the government can still use the budget to signal reform intentions or announce selected new initiatives that add some colour, it is difficult to see how this budget could deliver any major announcements or materially change sentiment in the short term. Expectations must therefore be tempered. This is unlikely to be a budget that will dramatically change market direction or sentiment.
We should also not forget that this year’s budget is presented against the backdrop of significant budgetary constraints. Tax collections have been relatively subdued in the current fiscal and with the cuts in GST rates, there is limited scope for any meaningful benefit on the revenue front. At the same time, expenditure pressure remains high, especially as higher expenditure is planned for fertilizer subsidies compared to last year, forcing the government to maneuver through a very tight budgetary framework. This is further exacerbated by the constraint on lower nominal GDP growth, which further limits fiscal flexibility. Given the government’s stated commitment to fiscal consolidation, it would be unrealistic to expect major problems, especially in the form of tax cuts. This is especially true when the government is also considering rationalization of customs duties as part of ongoing and proposed free trade agreements. Accordingly, expectations of capital gains tax relief or other capital market-friendly tax measures are unlikely. Even on the capex programme, the government is likely to maintain capital expenditure rather than boost it further, keeping expenditure as a percentage of GDP at a similar level to last year, but without dramatically changing the capex landscape.
While big rewards may be off the table, we expect the reform momentum to continue and possibly accelerate, which we believe will be the defining feature of this budget. Deregulation will get a bigger boost and could become the central theme of this budget, as soundbites from sources seem to suggest.
On the reform front, one of the most critical developments to watch will be progress on the Electricity Amendment Act. Any meaningful push in this direction would mark a major milestone in power distribution and broader energy sector reforms. This, coupled with the renewal of the IBC, would build on the reform trajectory underway in recent months.
In our view, this will be structurally very positive for Indian equities, although it will not stop sluggish market dynamics in the short term. The ongoing tariff challenges have given the government the required political space for bold reforms, which the government has so far effectively capitalized on through a series of reform measures in recent months. With the EU trade deal in hand, the administration has proven its skeptics wrong by effectively turning US tariff challenges into a golden opportunity to diversify trade dynamics. You will have to wait until Budget Day to know what else the government has in store to surprise us with the reform measures. That said, expecting a market rebound solely on fiscal measures could prove naive. This doesn’t mean that the gamblers won’t drive up stock prices faster than the budget, as they usually do. But that will be more trade problems that will disappear much sooner than the ink dries on the budget papers!
(Disclaimer: Recommendations, suggestions, views and expert opinions are their own. These do not represent the views of the Economic Times)
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