This Budget is being presented at a time when market conditions are extremely unsettled. Broader investor sentiment is weak, market participation is thin, and risk appetite remains subdued, but for the trading bounce in the last few trading sessions. The rupee has slipped to fresh lows, hovering close to the 92 mark, while trade uncertainties and geopolitical tensions continue to weigh on market sentiments. Notably, there is little visibility on any meaningful resolution to the US trade negotiations. This is the challenging backdrop against which the Budget is being unveiled.

The key question, therefore, is whether the Budget can do anything spectacular to revive market sentiment. Unfortunately, one is not sure whether the budget will provide the required refuge for battered investors to hide.

A large part of what is material to the markets today lies outside the scope of the Budget. The Budget is no longer the all-encompassing policy event it once used to be. Major indirect tax reforms have already been implemented through GST. Similarly, tariff and customs duty adjustments are increasingly being addressed through free trade agreements (FTAs), rather than through the annual Budget process.

As a result, the Budget has gradually been reduced to a largely procedural exercise that is more focused on reporting the government’s financial status and laying out projections for the next year. In that sense, the budget exercise has increasingly retreated into more of a ritual than anything material.

Even structural reforms have been unveiled outside 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 bill to opening up the nuclear space to the private sector etc. That said, the Government may reserve some critical reform measures like the electricity amendment bill or IBC revamp, etc., as part of the budget announcements to drive up the sentiments.

While the government may still use the Budget to signal reform intent or announce select new initiatives that add some colour, it is difficult to see how this Budget could deliver blockbuster announcements or materially alter sentiment in the near term. Expectations, therefore, need to be tempered. This is unlikely to be a Budget that dramatically shifts market direction or market sentiments.
Also, not to forget that this year’s Budget is being presented against the backdrop of significant fiscal constraints. Tax collections in the current fiscal year have been relatively subdued, and with GST rate cuts, there is limited scope for any meaningful upside on the revenue front. At the same time, expenditure pressures remain elevated, particularly with higher outlays planned for Fertilizers subsidy compared to last year, requiring the government to navigate a very tight fiscal framework.Compounding this is the constraint of lower nominal GDP growth, which further limits fiscal flexibility. Given the government’s stated commitment to fiscal consolidation, it would be unrealistic to expect any major sops, especially in the form of tax cuts. This is particularly true when the government is also contemplating customs duty rationalisation as part of ongoing and proposed FTAs. 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 rather than further stimulate capital expenditure, keeping the spending as a per cent of GDP at a similar level as last year, but without dramatically changing the capex landscape.

While large giveaways 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 be given a bigger push and could be the central theme of this budget as sound-bites 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 power sector reforms. This, coupled with the IBC revamp, would build on the reform trajectory that has been underway for the last few months.

This, in our view, will be structurally very positive for Indian equities, though it can’t stem the short-term sluggish market dynamics. The ongoing tariff challenges have given the Govt the required political space for bold reforms, which the Government has effectively capitalized so far through a series of reform measures in the last few months. With the EU trade deal in its pocket, Government has proved its sceptics wrong by effectively converting the US tariff challenges into a golden opportunity to diversify the trade dynamics. One has to wait for the budget day to know what more the Government has up its sleeves to surprise us on the reform measures. That said, expecting market revival solely on budget measures may prove to be naive. This doesn’t mean that the punters won’t drive up the stock prices ahead of the budget, as they usually do. But that will be more of trading bumps that will fizzle out much sooner than the inks dry on the budget papers!

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