Market Reaction to the Budget

The budget has been met with disappointment by the markets due to a lack of changes in capital gains tax and a significant increase in the securities transaction tax (STT) on derivatives. Concerns are also raised about the substantial gross market borrowing of ₹17.2 trillion, excluding ₹1.3 trillion for short-term borrowings/T-bills.

Foreign Investment Concerns

• Expectations of the budget attracting foreign capital, especially FDI and FPI, were not met.
• FPIs have sold over $40 billion of equities since September 2024, and India has received no net FPI flows for over five years.
• Net FDI flows are less than $10 billion annually, inadequate for India's size and potential.

Budget Arithmetic

The budget aims for a fiscal deficit of 4.3%, with nominal GDP growth of 10% and a moderate increase in tax revenues.

• Corporate and income taxes are projected to rise by 11% and 11.7%, respectively.
• Indirect taxes are expected to increase by only 2.3% due to new GST rates.

Government Expenditure

• Total expenditure will grow by 7.7% to ₹53.47 trillion.
• Effective capital expenditure increase of ₹3.1 trillion, focusing on defense, roads, and railways.
• Revenue spending is set to decrease, aligning with the decline in subsidies by ₹19,240 crore.

Capital Expenditure and Investments

• Central government capex is projected to grow by 11.5% to ₹12.2 trillion, with significant increases in defense capital equipment, railways, and roads.
• Concerns exist about the ability to sustain growth in capital spending, limited to 3.2% of GDP.

Challenges and Positive Measures

• The budget anticipates ₹80,000 crore in divestment receipts and ₹3.16 trillion in dividends from RBI/public sector banks, a historically high expectation.
• Increased allocations for rural employment guarantees and schemes like Jal Jeevan Mission and PMAY.
• Efforts to simplify taxation and encourage buybacks through tax restructuring.
• Investment in the electronics sector and initiatives to develop rare earth magnets, chemicals, biopharmaceuticals, and semiconductors.

Overall Budget Analysis

The budget continues fiscal correction and focuses on improving the quality of expenditure with capital spending prioritization. However, it lacks transformative ideas to enhance India's global economic position and attract foreign investors.

Concerns and Outlook

• Increased STT is expected to generate only ₹10,000 crore but may negatively impact trading volumes and liquidity.
• India is likely to remain a stock-specific market, with potential changes tied to earnings acceleration or fluctuations in AI trade.

The author's views are personal and do not reflect the official stance of Business Standard.