The budget has set a new normal and the market did not expect it. It was like the Schrodinger’s cat experiment. We
didn’t know if the cat was alive or dead until the box was opened. But at the same time, if one had followed the
announcements made during the last year or so, one may have figured out that this would be a
consumption-driven budget. Since 2014-15, we as investors have been pleased to see the Government
focus on infrastructure, defence and capex. It has done a wonderful job of putting India on the highest growth path
globally. We remember the 2016 Railway budget by the power minister where he announced 8.5 lakh crores of
expenses for the next five years. Capex is a very positive thing for the economy. It has a multiplier of 3.2 times as per
the RBI reports. Thus we have been in a virtuous cycle, despite COVID-19. This time, the Government chose to take a
balanced approach, by moderating capex growth and creating consumption through a reduction in taxes. Capex has
been increased by 10% over a weaker 2024-25. One would think that measures such as interest-free loans to States
up to 0.5% of GDSP for capex could have some positive impact.
Coming to the markets, how will these measures benefit the overall consumer space whether it be consumer
discretionary or non-discretionary. To be honest, although people expect consumption to improve instantly, the
benefits of tax cuts are going to be by next year. So we are looking at a corporate slowdown for FY 26, some of
which has been seen in the numbers across sectors. Which segment will benefit only time will tell, but reducing taxes
at the upper-end benefits household budgets for the higher end of the middle class from an Indian perspective. This
seems to be the strategy around countering the situation of the economy slowing down and the middle classes being
burdened by inflation. On another note, the private consumption expenditure has reached the highest since 2012 at
62% of GDP in 1HFY25 and this tells you a different story. Because of the slowdown in capex in FY25, the situation
has reversed in the current year in the first half in terms of what is now holding the economic growth. In that sense, it
is a paradox as consumption was not expected to be driving this growth as we saw it last year.
What to do in terms of how to play the market from here on, I think clearly one needs to be cautious of engineering
names, especially the ones sharply expensive and building in 35% growth for eternity i.e. some PSUs, engineering
MNCs and others connected. The railway stocks have been hammered because there have been lots of
expectations built in and these were at mercurial valuations. However, we have to play by the ear here because the
government continues to make announcements outside the budget as well, and therefore we cannot just take this
and decide for the next five years as to what is likely to happen. There are many expensive names across the market
which have exposure to the capital expenditure and engineering themes of the economy and I think we will keep
evaluating them for opportunities, i.e. if they get cheap enough for us.
Our focus continues to be on bottom-up stock selection and we think being a little defensive in this market would do
no harm. We have significant exposure to bottom-up ideas in pharma, crop protection, chemicals, housing and
related sectors, infrastructure, auto ancillaries and others in the economy which are reasonably priced and aligned to
growth.