Investors Should Expect Few Surprises in Upcoming Budget, Says Jefferies

As India prepares for its next Union Budget, global investment bank Jefferies advises investors to keep their expectations in check. The firm anticipates a budget with limited major surprises, forecasting that the government will stay its current course. The primary focus is expected to be on continuing fiscal discipline while carefully directing spending towards key areas like national defence and specific consumer support.

A Steady Path on Fiscal Consolidation

Jefferies predicts the government will remain committed to reducing the fiscal deficit, which is the gap between its total spending and revenue. The target for the financial year 2027 is seen around 4.2% of the country’s Gross Domestic Product (GDP). This would be a continuation of the government’s stated goal of bringing the deficit down to below 4.5% by 2026. Sticking to this path is crucial for maintaining economic stability and investor confidence.

However, the analysts note a potential alternative scenario. If the government sets a slightly higher deficit target, say 4.4% of GDP, it could be read as a deliberate signal. Such a move would indicate a stronger push to accelerate economic growth through increased spending. This “growth push” scenario would likely be welcomed by stock market investors, as more government spending can boost corporate earnings. Yet, it would also put pressure on government bond yields, potentially leading to higher borrowing costs.

Defence Spending Takes Center Stage

Among the key areas to watch, Jefferies highlights defence capital expenditure as a major budget theme. This refers to government spending on long-term military assets like new aircraft, naval ships, and advanced weapon systems. Increased defence spending is seen as a multi-year priority driven by geopolitical factors and the government’s push for domestic manufacturing, known as “Make in India.”

This focus is significant for investors because it benefits a wide range of companies. Not only does it support large state-owned defence contractors, but it also flows to numerous private sector firms involved in manufacturing electronics, metals, and engineering components. Sustained high defence spending acts as a reliable engine for these industrial sectors.

Seven Other Key Measures for Investors to Monitor

Beyond the broad deficit number and defence outlay, Jefferies advises clients to watch for specific policy details. The firm lists seven other important measures that could move markets. These include any changes to capital gains tax rules, which directly impact investment returns. Announcements related to production-linked incentive (PLI) schemes for more industries will also be closely watched, as these subsidies have driven significant manufacturing investments.

Further, the budget may outline plans for targeted consumption support. This could involve programs or subsidies aimed at boosting spending among lower and middle-income households, potentially benefiting sectors like consumer goods and automobiles. Other areas of focus include infrastructure spending, policies for the agricultural sector, and any updates on the government’s asset monetization program, where state-owned assets are leased to private operators to raise funds.

In summary, Jefferies paints a picture of a pragmatic, continuity-focused budget. The overarching goal is expected to be balancing the need for growth with the imperative of fiscal responsibility. For equity investors, this steady approach provides a predictable environment, with specific opportunities in defence and targeted consumption. Bond market participants, however, will be parsing every detail of the deficit target to gauge the future direction of interest rates.