The government stuck to the fiscal consolidation path with fiscal deficit target for FY2025-2026 at 4.4%. It committed to keep the central government public debt on a declining path towards 50% of GDP by FY2031. Direct tax collection is expected to grow in line with the nominal GDP growth rate, while non-tax revenue continues to receive support via extra dividends from the Reserve Bank of India as well as from target sales of public assets. 

Despite the fiscal consolidation, the government committed to support consumption for its middle class by readjusting income tax slabs to provide relief to personal income taxpayers and boost middle income consumption. Under the new tax regime, there would be no personal taxes on income up to Rs 1.2 million, which is expected to partially help indebted consumers by boosting household financial savings whilst boosting consumption for other households. India has also kept capital gains taxes unchanged. Thresholds at which higher tax slabs kick in were also increased. 

Overall capital expenditure to boost infrastructure development for FY2026 has seen a growth of 11% year-on-year compared to the revised estimates for FY2025, broadly in line with the GDP growth estimates. The budget speech emphasised public private partnership plans for infrastructure projects, the implementation of which needs to be seen. On the manufacturing side, the ‘Make in India’ focus continues, with more money allocated to production-linked incentive schemes to encourage multinationals to set up manufacturing bases in the country.

Consumption: Visible focus on rural and urban demand generation, skewed towards the middle class, is expected to benefit the consumer names in the portfolio, with some benefitting more than others. These include consumer staples names such as Tata Consumer Products and Hindustan Unilever, as well as auto names like Bajaj Auto, consumer durables play, Havells, and organised retail players like Phoenix Mills. The budget also focused on domestic tourism will be positive for Indian Hotels.

Industrials: Status quo for the sector with ~11% growth in capital expenditure compared to revised estimates for the current fiscal year (FY25). The portfolio is hedged, with positions in infrastructure proxy, Larsen & Toubro (held in our US domiciled closed end fund), industrial plays, Siemens Inc and ABB India that cater to different segments as well as ancillaries like KEI Industries and Apar Industries.

Financials: Private banks are expected to benefit from consumer-led demand growth and the portfolio is well positioned with ICICI Bank, Axis Bank, and HDFC Bank. The budget was a non-event for the insurance sector, but misinterpretation of announcements led to a fall in insurers’ share prices in the immediate aftermath, before recovering, which signifies how jittery the market is towards regulatory/top-down dynamics. Meanwhile, changes to the tax regime will put ~US$12 billion into the hands of consumers, which would indirectly benefit the non-bank financial companies, as they can choose to save, pay down debt, borrow more, or spend. Consumer lending had slowed in 2024 but is likely to see improvements post the budget announcements.

Market correction: After a strong and steady run that began in 2021, the Indian market pulled back in Q4 2024, driven mainly by weakness in consumer demand and a slowdown in capital expenditure (following the 2024 election), resulting in earnings growth moderating over the last few quarters. Monetary policy has remained tight, in part tied to the US Federal Reserve’s position, while a continued emphasis on fiscal discipline and moderating government spending on infrastructure, alongside a clampdown on secured lending on asset quality concerns, have all contributed to this correction. Investors also rotated out of emerging markets, including India, post-President Trump’s election victory. The budget’s focus on boosting consumption while maintaining capital expenditure at a similar level as last year is likely to have an impact on investor sentiment. In 2025 thus far, domestic inflows have offset foreign institutional outflows. The pace of foreigners selling out of India has also slowed since 22 January 2025 while domestic inflows have stepped up in recent days (source: CLSA). Another potential boost is from the RBI’s plans to inject around $18 billion in cash to aid banks, paving the way for an imminent and expected rate cut. 

Valuations looking less stretched: Valuations have come off somewhat in recent months due to the moderation in earnings growth, but it is still elevated compared to other emerging markets. Some of this premium is justified by the long-term macro backdrop and the impact of reforms that is feeding through to the broader economy, while corporate India is in a relatively better shape than in the past, reflected in steady earnings growth and delivery in recent years. Moreover, the trend of domestic retail investors entering the market, notably through systematic investment plans (SIPs), where they commit to regular monthly investments into mutual funds, is expected to continue over the long term. As such, in our view, this current pullback is a buying opportunity given the positive long-term outlook.

Positive long-term outlook: Despite the short-term challenges, the long-term outlook for India is still positive, driven by supportive policies and a decade of necessary but painful economic reforms. This budget’s focus on consumption could provide a needed catalyst for the overdue recovery in rural demand, helped further by a good monsoon whilst the upcoming harvest season would likely help to keep food prices at manageable levels. In our view, buying into quality through bottom-up stock picking is key to leveraging India’s potential. This means investing in well-run companies with steady cash flow and strong balance sheets, which lend some degree of defensiveness even in tough times.

The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.

Past performance is not a guide to future results.

Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.

The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.

The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.

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As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.

The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.

Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.