Finance Minister Nirmala Sitharaman's Union Budget received a thumbs up from economists, analysts and CEOs alike. But, it doesn't seem to have enthused capital market investors a lot, or so it seems from the market reaction.
On Budget day, benchmark indices ended almost flat and on Monday, markets continued to fall. The BSE Sensex closed 319 points or 0.4 per cent lower at 77,186.74 level, and the NSE Nifty50 closed 121 points or 0.5 per cent lower at 23,361.05 level.
While the Union Budget was a key market mover, US President Donald Trump unleashing a new trade war by announcing tariffs on Canada, Mexico and China added to investors' concerns.
Amid a slowing economy and high food inflation that had pinched urban demand, there was a growing voice that the Budget should announce measures to give India's vast middle-class consumers a boost.
On that count, the Finance Minister delivered. As per the Budget announcement, now not only people earning annual income up to Rs 12 lakh will pay no income tax, but tax slabs have been revised such that even those earning between Rs 12-24 lakh will have to pay a lower tax under the new tax regime.
Overall the income tax bonanza will leave a fair bit of money in the wallet for the middle class to spend and that should in turn boost the economy. At the same time, the government has remained firmly on the fiscal consolidation path, projecting a lower fiscal deficit for next year.
"Despite the fiscal consolidation, the government readjusted income tax slabs to provide 0.3 per cent of GDP tax relief to personal income taxpayers. We believe this will partly help the indebted urban consumer deleverage (and boost net household financial savings), and partly boost consumption in a section of urban households," said Santanu Sengupta, chief India economist at Goldman Sachs.
In anticipation of a consumption boost, shares of consumer-facing companies saw a strong uptick post-Budget. Consumer durables companies, and select FMCG companies have continued to see good buying on Monday. But, there has been a massive sell-off in shares of engineering and capital goods companies.
The BSE Capital Goods Index slumped over 4 per cent on Monday; many of the sectoral stocks like Siemens, Thermax, ABB, NBCC, Bharat Heavy Electricals, Larsen and Toubro and CG Power among others had declined up to 7 per cent on Budget day and further declined between 2 per cent to 9 per cent on Monday. Stocks related to the railway sector too have been under a lot of selling pressure.
A key concern among investors was that in the Budget, the government seemed to have prioritised consumption over capital expenditure.
"The Budget has tried to balance the twin objectives of fiscal discipline and supporting growth. At the margin, there is a tilt towards supporting consumption through tax cuts for middle-class households, relative to the public capex push seen over the last four years," pointed Sonal Varma, Nomura's chief economist (India and Asia ex-Japan).
On the face of it, the budgetary allocation to capital expenditure for the 2025-2026 financial year at Rs 11.2 lakh crore is around 10 per cent higher than the revised estimates for the current financial year. But economists point out that as a share of GDP, central government capex has remained flat at 3.1 per cent. Capex allocation to states has increased 22 per cent according to Goldman Sachs, which likely indicates the government is passing the capex baton to states.
If we look at the capex breakdown, the defence capex allocation is up a good 13 per cent. However, capex allocation for roads and railways has been flat, pointed Goldman.
Externally, the US President unleashed a new trade war slapping tariffs on neighbours Mexico and Canada, and even China. While, Mexico and Canada retaliated with their own measures, China has also woved to react. This will in all likelihood derail global trade and fuel more global economic uncertainty.
Nervous investors dumped global stocks on Monday. Asian stocks ended largely lower, with Japan's Nikkei 225 index plunging over 2.5 per cent. Europe markets were also trading lower, with Germany's DAX, France's CAC40 and the FTSE100 index in London, all down more than 1 per cent.
"The global market got unsettled amid the onset of the trade war as tariff conflicts between the US and other nations are unlikely to yield any economic benefits. Instead, it may cause challenges to the global economy, heightening global financial risks," pointed Vinod Nair, head of research at Geojit Financial Services.
Amid the global uncertainty, foreign investors continue to pull out money from emerging markets, including India, turning to the safety of the US Dollar. In January 2025 alone, foreign portfolio investors sold over Rs 78,000 crore in India's equity market and the tariff war could lead to more outflows. The huge outflows are in turn putting pressure on the rupee, which slid past the 87 per US dollar mark. That will hurt importers as well as worry Indians going abroad to study or even travel.
All eyes will now be on the Reserve Bank of India's monetary policy committee, which meets this week. This will be the first monetary policy under new Governor Sanjay Malhotra. With India's GDP growth slowing, the expectation was that the central bank could start cutting interest rates, albeit modestly from the upcoming MPC meeting.
With growth and demand slowing and inflation expected to cool further, the expectation of a rate cut still holds, but don't expect steep cuts. The MPC will be particularly watchful of how demand pans out following the Budget consumption stimulus and the impact it may have on prices over time. How the Trump-unleashed trade war pans out will be a key thing to watch. The central bank will also be keeping a close watch on the falling rupee.