Business
Budget expectations low, says Jefferies; lists defence capex among 8 measures to watch out for
Jefferies expects the Centre to peg the FY27 fiscal deficit at around 4.2% of GDP, implying a slower pace of consolidation of roughly 15–20 basis points annually through FY27–31.
“Alternatively, the Govt could hold the deficit near 4.4%, signalling a push for near‑term growth—positive for growth/equities but likely to firm up bond yields,” the brokerage noted. India’s debt-GDP ratio, still above pre-Covid levels, is targeted to be reduced by about 5 percentage points by FY31, even as tax revenue growth in FY27 is projected at around 8%, marking a third straight year of sub‑10% growth.
A key fiscal support will be another strong transfer from the Reserve Bank of India. Jefferies estimates the FY27 RBI dividend could rise 10–15% to about ₹3 trillion, aided by rupee depreciation, helping offset weak tax buoyancy and keep the deficit target within reach.
Capex to turn defence heavy
On expenditure, Jefferies expects overall government capital spending to grow about 12% in FY27 to ₹12.5 trillion, but stresses that “the requirement of a reset in defence capex will take priority, which may grow at a much higher 25%.” With year‑to‑date FY26 defence capex already up 57%, the brokerage sees non‑defence capex growth moderating to the 5–10% range, even as welfare spending edges higher.
Jefferies projects central government capital expenditure on defence to rise towards 1% of GDP by FY31, a level last seen four to five years after the Kargil conflict, and highlights that India’s overall defence spend as a share of GDP still trails peers such as Russia, the US and Pakistan, leaving “headroom to rise.”
Pay commission risk and market taxation
The looming 8th Central Pay Commission is another big macro swing factor. The decadal government salary reset of over Rs 7 trillion was due in January 2026, but the commission’s formation has been delayed. With key state polls such as Uttar Pradesh scheduled for March 2027, Jefferies believes “the govt may allocate most of the pay hike in the upcoming Budget, with arrears spread into the next fiscal,” warning that central pay hikes alone could widen the fiscal deficit by 20–30 bps of GDP and, once states follow, by about 100 bps over two years.On markets, Jefferies flags the possibility of changes in capital market taxation but does not build them into its base case. It notes that “a potential capital gains tax relief for select FPI categories could be a positive for equities, though not our base case,” while any tax benefit to boost debt market and bank deposit inflows would be a negative for equity markets.
The brokerage also points out that 10‑year G‑Sec yields have stayed broadly flat despite a 125 bps cut in the repo rate, underscoring “a structural demand problem” in the bond market.
Sector cues from Jefferies
Jefferies sees the FY27 Budget as a stock‑specific catalyst across financials, capital goods, defence, renewables, real estate, travel and building materials, contingent on the fine print of allocations and tax tweaks. Sectorally, it expects:
Capex growth to stay muted at around 10% or lower overall, with a “lower rise in road budget at 0–5% and higher in rail at 10%+” and sustained focus on indigenisation in defence.
Cement demand to be supported by continued high allocations for roads, railways, metros and housing, with 10–12% of demand from low‑cost housing and 23–25% from infrastructure, and an additional push if rural incomes improve.
Tobacco to remain a key “monitorable” after the recent excise and GST changes, as the Centre can still tweak the National Calamity Contingent Duty on cigarettes, a risk factor for ITC.
Eight key measures to watch
Jefferies distils the Budget watchlist into eight specific policy and allocation signals that could move individual stocks and themes:
1) Measures that boost deposit growth, including tax incentives, which would be positive for banks.
2) Any increase in tax‑relief investment limits for traditional life insurance plans (currently ₹5 lakh) or ULIPs (₹2.5 lakh), supporting life insurers.
3) Strong (over 20%) growth in defence capex, a clear positive for defence PSUs and other defence contractors.
4) Budget allocation under the Mobile PLI scheme as it nears expiry in FY26, crucial for EMS players such as Dixon.
5) Higher allocations for the PM Kusum solar‑agri pumps scheme, which could rise from ₹26 billion in FY26 to ₹100 billion in FY27, benefiting cell‑backed players like Emmvee, Premier and Waaree.
6) Pay‑commission‑linked pay‑hike provisioning that boosts middle‑class incomes in the ₹10–20 lakh bracket, aiding consumer durables, two‑wheelers and four‑wheelers.
7) Support for affordable housing through relaxed definitions and expanded CLSS interest subsidy, aiding affordable housing lenders and select developers.
8) Policy support and tax benefits for Data Centers and Global Capability Centers, which would be a tailwind for power equipment makers and office/data‑center‑focused developers and REITs.
