Budget 2025: Capex Growth Could Fall Short Of Target, Says Jefferies

The government's fiscal goals may lead to slower-than-expected growth in capital expenditure, according to Jefferies. With the need to cut the fiscal deficit to below 4.5% of GDP by FY26, amid slowing GDP growth, the brokerage suggests that the government's capex growth, projected at around 10%, could fail to meet market expectations, potentially dampening investor sentiment.

A sharp capex rebound, such as the 15% growth seen between FY21-24, is unlikely due to rising pressures from social spending and deficit reduction targets, the brokerage noted. While the government may still announce a larger-than-expected figure for capex, questions about its sustainability could emerge, especially in the context of FY25's slow capex performance.

The report highlights that the government's fiscal deficit reduction plans, coupled with potential savings from the capex budget, could provide room for interest rate cuts. This could open up buying opportunities for markets, especially given that the Indian equity market is already down 12% from its peak.

Key sectors to watch in the upcoming budget include welfare measures aimed at boosting consumption, with possible hikes in allocations for programs such as the Farmer Income Transfer Scheme and health insurance. The Production Linked Incentive schemes, particularly in electronics and semiconductors, are expected to expand, benefiting stocks in these sectors, such as Syrma SGS Technology Ltd., Kaynes Technology India Ltd., and Amber Enterprises India Ltd.

However, the budget could also bring challenges, including potential changes to capital gains taxation. Jefferies cautions that any hike in capital gains taxes, particularly for short-term holdings in equities, could dampen market sentiment. Additionally, there may be sector-specific impacts, with disappointment in capex growth potentially weighing on the performance of EPC contractors like Larsen & Toubro Ltd. and the broader industrial sector.

Despite these challenges, Jefferies remains optimistic that the upcoming budget could present opportunities for select sectors, such as electronics, telecom, and consumer discretionary stocks, depending on the specifics of government policies and budget allocations.