Budget 2025: Market Eyes Inflation Ahead of Budget; Will 4.6% Target Benefit Investors?

Budget 2025: Investors and market experts are keenly watching the government's fiscal policies ahead of the Union Budget 2025. According to Rajesh Cheruvu, Managing Director and Chief Investment Officer of LGT Wealth India, this year's budget may focus on fiscal prudence and could reinforce market sentiment with a fiscal deficit target of 4.5-4.6%.

Fiscal Prudence and Fiscal Deficit (Budget 2025)

Fiscal prudence refers to the government maintaining a balance between its expenditure and revenue to ensure stability in the economy. A fiscal deficit is a situation where the government's total expenditure exceeds its total revenue. Currently, the government aims to bring the fiscal deficit down to 4.5% of GDP by fiscal year 2025-26. If Budget 2025 sets a target of 4.6%, it would be considered a positive step in this direction.

Significance of Fiscal Deficit and its Impact on the Market

The fiscal deficit is the difference between a government's expenditure and its revenue (Budget 2025). In India, the government borrows to fund various economic and social schemes, which can increase this deficit. If the government successfully controls this gap, it could be a positive sign for investors and the market (Budget 2025).

What Does the Indian Stock Market Need?

Budget 2025 will be a crucial indicator for the Indian stock market, as it will be the first full budget (Budget 2025) of the Modi government 3.0. Market experts believe that if the government takes the following steps, enthusiasm can be seen in the market:

1. Changes in Capital Gains Tax – A reduction in long-term capital gains tax would provide relief to investors and could boost the market.
2. Income Tax Reforms – If the government increases the exemption limit in the old and new tax systems, people's disposable income will increase, leading to increased consumption and investment.
3. Boosting Manufacturing and Employment – New schemes for the manufacturing sector and job creation would send positive signals to the market.
4. Emphasis on Infrastructure – Increased investment in roads, railways, and green energy would benefit the construction and real estate sectors.

Can the Budget Eliminate the Market Slump?

The Indian stock market has recently been impacted by global uncertainties, inflation, and the US Federal Reserve's interest rate policies. If the government prioritises financial stability and growth through the budget (Budget 2025), it will be encouraging for the market.

Taking concrete steps in these areas in the budget could help change the negative market sentiment:

1. Policies to promote manufacturing and exports
2. Fiscal discipline to ensure rupee stability
3. Relief package for Micro, Small, and Medium Enterprises (MSMEs)
4. Potential reduction in corporate tax

Key Considerations

• Invest in sectors that will be prioritised by the government based on the reforms introduced in the budget.
• Financial services, banking, defence, and green energy sectors may see potential growth.
• Maintain portfolio diversification to avoid losses from a downturn in any one sector.
• Make long-term investments in companies with strong fundamentals.

Risks

Investors investing in the market should not ignore some important risks.

1. Risk of increased fiscal deficit – If the government abandons fiscal prudence due to populist policies, it could affect the strength of the rupee.
2. Global uncertainties – The strengthening of the US dollar and the increase in global bond yields could reduce foreign investment.
3. Q3FY25 results – If the corporate results of the third quarter are weaker than expected, selling pressure in the market could increase.

Impact of the Trump Factor

Donald Trump's potential return to power in the US could impact global trade and Indian markets (Budget 2025). If the Trump administration adopts stricter trade policies, it could lead to increased investment in India as opposed to China. However, if US interest rates (Budget 2025) remain high, the flow of Foreign Portfolio Investment (FPI) into Indian markets could be affected.

Sectors to Watch

Investors should focus on the following sectors for the next 1-2 years:

• Renewable Energy – Power transmission and distribution companies, in particular, could be attractive.
• Capex-related sectors – Investment in semiconductors and digital infrastructure could be beneficial.
• Consumption – The hotel, gold, and jewellery sectors may see good performance.