Union Budget 2025-26: Boosting Consumption and Middle Class Relief
The Union Budget 2025-26 brought relief for the middle class with personal tax cuts aimed at increasing disposable income, which is expected to positively impact discretionary spending in sectors like autos, jewellery, travel, and real estate.
Union Budget 202526Tax CutsMiddle Class ReliefConsumption BoostFiscal DisciplineReal Estate NewsFeb 03, 2025
However, the government's decision to reduce personal tax for the middle class came as a pleasant surprise.
This move is aimed at increasing disposable income for salaried individuals, thereby boosting overall consumption.
Additionally, there was relief that the capital gains tax remained unchanged, which was a key concern for the markets.
The primary disappointment was the lack of significant announcements for capital expenditure (capex) in sectors like roads, railways, and defence.
The budget did not allocate additional funds for these areas, which had been a focus in previous years.
Instead, the government emphasized 'ease of doing business' and continued its commitment to fiscal discipline, projecting a fiscal deficit of 4.4% of GDP for FY26, down from 4.8% in FY25.
The government also continued to support the rural economy and agriculture.
Incremental measures were announced to enhance the penetration of existing schemes, increase credit facilities, and improve productivity and production.
These steps are expected to further strengthen the rural sector.
One of the key highlights of the budget was the personal tax relief for the middle class.
This should positively impact discretionary spending, particularly in sectors like autos, jewellery, travel, and to some extent, real estate.
Among auto sectors, both two-wheelers and passenger vehicles are likely to benefit from the tax cuts.
The budget also includes additional benefits such as the value of a second self-occupied home being considered as NIL.
The government has also focused on improving credit to micro, small, and medium enterprises (MSMEs) and first-time entrepreneurs.
The exemption limit for interest received from bank accounts for senior citizens has been increased from Rs 50,000 to Rs 1,00,000, which should aid in improving deposit mobilization by banks.
The enhancement of foreign direct investment (FDI) limits in the insurance sector is another significant move.
This will provide an exit route for Indian promoters and create more competition from foreign players, aiding in product development.
From an equity market perspective, the budget was broadly neutral.
The focus will now shift back to earnings, valuations, and global developments.
We remain constructive on the equity markets over the next one year, with modest return expectations.
Consumption, rural plays, and building materials are expected to attract investor interest, while capex and manufacturing sectors might take a backseat due to the budget's focus on consumption.
Banking valuations, particularly in the private sector, are attractive and present a medium-term opportunity, despite near-term concerns related to growth slowdown and the possibility of slowing net interest margins (NIMs) as the RBI starts cutting rates.
In the broader market, large-cap and mega-cap stocks are preferred due to their lower volatility and the global uncertainties affecting mid-cap and small-cap stocks.
The budget was broadly neutral for fixed income markets, with the government maintaining its fiscal consolidation course and not increasing net market borrowings.
The Reserve Bank of India (RBI) will now play a crucial role in charting the future course for fixed income yields, with a focus on easing banking system liquidity, managing the Rupee, and implementing shallow rate cuts (50-75 basis points) this year.
Our outlook for fixed income remains positive, with the expectation that yields will head lower over the next one year as the RBI shifts its focus towards growth and liquidity easing.
Frequently Asked Questions
What are the key highlights of the Union Budget 2025-26?
The key highlights include personal tax cuts for the middle class, maintaining the fiscal deficit at 4.4% of GDP, and a focus on 'ease of doing business'. The budget also supports the rural economy and agriculture through incremental measures and increased credit facilities.
Why was the budget disappointing for capex sectors?
The budget did not allocate additional funds for capital expenditure in sectors like roads, railways, and defence, which were prominent in previous years. This lack of significant announcements for capex projects led to disappointment in the markets.
How will the tax relief for the middle class impact consumption?
The tax relief for the middle class is expected to increase disposable income, which should positively impact discretionary spending in sectors like autos, jewellery, travel, and real estate.
What measures were announced to support the rural economy?
The government announced incremental measures to enhance the penetration of existing schemes, increase credit facilities, and improve productivity and production in the rural economy and agriculture.
What is the outlook for the equity and fixed income markets post-budget?
The outlook for the equity markets is constructive over the next one year, with a focus on consumption, rural plays, and building materials. For fixed income markets, the outlook is positive, with expectations of lower yields over the next one year as the RBI focuses on growth and liquidity easing.
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