Union Budget FY25-26 to focus on fiscal prudence and targeted reforms: Phillip Capital report

The report emphasizes continued investment in core capital expenditure (capex) in areas like railways, roads, and defence, though a significant overall capex increase is deemed unlikely.

Phillip Capital projects the fiscal deficit for FY26 to range between 4.5 per cent and 4.6 per cent of GDP, while FY25 is expected to close slightly higher at 4.6 per cent-4.7 per cent.

In case the government opts for fiscal expansion in FY26, raising the deficit to 4.7 per cent-4.8 per cent, the report anticipates growth-oriented measures to stimulate the economy.

For FY25, the fiscal deficit is expected to be lower than the budget estimate (BE), coming in at 4.66 per cent compared to 4.94 per cent BE. This improvement is attributed to robust tax collections, a higher RBI dividend, and reduced capex.

However, disinvestment proceeds are projected to fall significantly short of the Rs500 billion target, with estimates closer to Rs100 billion. Fertilizer and petroleum subsidies are also expected to exceed budgeted projections.

Gross tax revenue is expected to grow by 10 per cent, with revenue receipts rising by 5.7 per cent in FY26, driven by strong income tax and GST buoyancy.

However, a reduced dividend from the Reserve Bank of India (RBI) compared to FY25 could restrict the scope for expenditure growth. Disinvestment targets are likely to be set at Rs500 billion, though actual realizations are expected to remain lower at Rs250 billion, consistent with last year's performance.

On the expenditure side, total spending is projected to grow by 6.4 per cent, with a substantial 19 per cent increase in capex for FY26. Revenue expenditure growth, however, is expected to remain muted at 3.2 per cent, largely due to stable subsidies and adherence to fiscal targets.

The report highlights multiple sectors poised to benefit from the upcoming budget. For the rural economy, higher allocations to schemes like PM-Kisan, Agri Credit, and MGNREGA could positively impact FMCG and agricultural input companies.

Additionally, an anticipated increase in income tax basic exemption limits may stimulate consumption demand. Fertilizer subsidies are expected to rise to Rs 1.80-1.85 trillion for FY26.

In the insurance and healthcare sectors, measures such as higher Section 80D exemptions reduced GST on life and health insurance, and an expanded Ayushman Bharat scheme could provide a significant boost.

Public-sector insurers may see capital infusions and the Insurance Amendment Bill could raise the FDI limit to 100 per cent. Diagnostic firms and medical device manufacturers are also likely to benefit from potential GST reductions and export incentives.

Core capex is expected to maintain an upward trajectory, with better execution compared to FY25. Focus areas include railways, roads, metro projects, affordable housing, and defence capital outlay. Additional allocations for river-linking, drinking-water projects, and "green steel" transitions are anticipated.

The PM Awas Yojana is projected to receive an increased allocation of Rs800 billion, benefiting housing finance companies. In the telecom sector, the government is reportedly considering waiving a significant portion of Adjusted Gross Revenue (AGR) dues--amounting to over Rs 1 trillion--providing financial relief to Telco's and improving their operational viability. (ANI)