Analysis | A fiscally prudent, growth-oriented budget

Finance Minister Nirmala Sitaraman presented her record ninth consecutive budget in the backdrop of heightened geopolitical tensions in a turbulent world. Despite the headwinds from Trump tariffs and a fractured global trade system, the finance minister had the advantage of a robust Indian economy clocking the fastest growth rate among the large economies of the world.

The average annual GDP growth during FY22 to 26, factoring in the estimated 7.4 per cent GDP growth for FY26, is an impressive 8.1 per cent, assisted, of course, by the low base of the Covid year FY20-21. Inflation, the fiscal deficit, and the current account deficit are under control.

The fact that India has achieved this impressive growth while maintaining financial stability enhances the quality of growth. Even though the US-India trade deal is still hanging fire, the mega India – EU trade deal has come as a shot in the arm for the economy.

Despite these tailwinds, the pressure points in the economy, like sustained portfolio outflows ($18 billion in 2025), steadily depreciating rupee, poor FDI and absence of any significant private capex, have been acting as headwinds constraining sustained growth. The task before the finance minister was to address these challenges and facilitate sustained growth of the economy. It goes to the credit of the FM that she has risen to the occasion and presented a growth-oriented, finely balanced budget.

Long-term vision of growth with fiscal discipline
I would rate this budget high for its long-term vision of growth-orientation with fiscal prudence. The FM has delivered what the economy needs, at this juncture. Indian economy is doing well despite many headwinds like the Trump tariffs. The 7.4 per cent GDP growth rate for FY26 makes India the fastest growing large economy in the world, for the fourth year in a row.

The challenge is to sustain this growth rate even in the midst of geopolitical tensions in a fractured global order. For FY27, the 7 per cent growth rate target can be achieved. It is important that this growth is achieved through fiscal prudence. So, what the economy wanted was a growth-oriented budget with fiscal prudence and, this is exactly what the FM has delivered.

With 7 per cent GDP growth and around 3.5 per cent inflation, nominal GDP growth of around 10 percent for FY27 is achievable and this would be a significant improvement over the 8.1 per cent nominal GDP growth in FY26. More importantly, from the market perspective, this is good news because 10 per cent nominal GDP growth has the potential to deliver 15 per cent earnings growth in FY27 triggering a modest rally in the market, after the initial negative reaction, which is unlikely to last beyond a couple of days.

Fiscal consolidation to continue
The government has stuck to the fiscal consolidation glide path by achieving fiscal deficit target of 4.4 per cent of the GDP for FY26 and targeting 4.3 per cent fiscal deficit for FY27. The debt to GDP ratio is targeted at 55.6 per cent for FY27. There is no compromise on fiscal discipline. Growth orientation with fiscal discipline is the hallmark of this Budget.

STT on F&O trade spooks the market
A budget proposal that spooked the market was the decision to raise the STT (Securities Transactions Tax) on F&O: STT on futures was raised from 0.02 per cent to 0.05 per cent, while STT on options premium was raised from 0.10 per cent to 0.15 per cent. It is important to understand that this is not a revenue raising measure, but a decision to discourage retail traders, 92 per cent of whom were losing money in F&O trades, from trading in the F&O market.

This is a welcome move, though sentimentally negative in the short run. On the other hand, the decision to treat share buybacks as capital gains, treating all shareholders alike and imposing additional tax on promoters for buybacks, is a welcome move from retail investors perspective. This will discourage improper use of buybacks by promoters.

Modest increase in sectoral allocations for defense and public capex
The sectoral allocations for defense and infrastructure are on expected lines, given the revenue constraints. The capital expenditure for FY27 is targeted at ₹12.2 lakh crore. Defence allocation has been raised to ₹5.94 lakh crores. The high public capex will continue to assist growth.

Investors can remain invested and continue systematic investment. A major development, beside the budget, is the crash in gold and silver prics. The speculative boom in the precious metals has been busted, at least for the near-term, and this has the potential to bring investors back into the equity markets.

After the initial disappointment relating to unrealistic expectations of tax reliefs die down, the market will start responding to fundamentals. If FII selling drags the market further down in the near-term, the domestic consumption driven largecaps will become attractive buys from the fundamental perspective. DIIs will turn buyers in these segments imparting resilience to the market. There are pockets of overvaluation in mid and small caps and, therefore, investors should be choosey in these broader market segments opting for fairly valued growth stocks.

(The author is the Chief Investment Strategist at Geojit Financial Services Ltd)