Budget 2025: India May Curtail Capex Spend As It Faces 'Tough Trilemma', Says CLSA

The Narendra Modi government will face a "tough" task of balancing a trilemma — fiscal consolidation, capex-led growth and boosting consumption and jobs — as the world's fastest-growing major economy gears up for its annual budget this week, according to analysts at CLSA.

The upcoming budget, Finance Minister Nirmala Sitharaman's eighth, comes at a crucial time when global economic growth and domestic inflation are top focus.

Amid calls for higher capex push, CLSA says that the government will stick to its commitment of a 4.9% fiscal deficit in fiscal 2025 and 4.5% next year. This fiscal deficit commitment will require the government to curtail growth in capex spend in both fiscal 2025 and 2026. CLSA says that this may be seen as a disappointment versus the high expectations baked into capex-linked stocks.

The brokerage expects the fiscal 2025 corporate tax collection to miss the budget target, but may partly be offset by stronger income tax collection. The central government’s net revenue may fall short by over Rs 700 billion in fiscal 205 versus the budgeted estimate, according to CLSA.

Helped by the curtailment of capex, it expects fiscal 2025 fiscal deficit to come at the target of 4.9%. "FY26 deficit target of 4.5% will need some tough balancing and help from RBI."

Total dividend receipts may end FY25 with over a 75% year-on-year gain helped by large dividends from the central bank. Profit booking from the aggressive selling of US dollar in late 2024 by the RBI may keep dividends from RBI at a high level, CLSA said.

Moreover, any change in focus to spending on jobs or consumption measures could further limit capex spending. The budget may also push the government to find other avenues to raise revenues like higher disinvestment or raising excise duty on fuels, which may be seen negatively for PSU energy stocks.

The underperformance of Modi basket of PSU and capex stocks may continue, according to CLSA. Coming after four years of 25%-40% year-on-year growth, the capex-linked stocks may be seen as a disappointment versus the high expectations, CLSA said. "We believe investors may see valuation elevated on these names and this basket may continue its underperformance."

ITC Ltd., city gas, insurance and oil marketing company names may also be in focus in this budget, it said.

Increased allocations for infrastructure projects and any hike in import duty on steel and a cut in duty on coking coal could benefit steel producers.

Any move to attract more assesses into the new tax regime would be a negative for life insurance companies due to the rebate offered by the old tax regime, CLSA said.