Capex increases along with income tax cuts difficult in Budget 2025: Rahul Bhuskute of Bharti AXA Life Insurance

Expert view on markets: Rahul Bhuskute, CIO of Bharti AXA Life Insurance, believes that in Budget 2025, the fiscal space for income tax relief will be limited unless the government shifts away from the continuing capex focus. He believes pursuing capex increases along with income tax cuts will be difficult, given the commitment to the 4.5 per cent fiscal deficit target. In an interview with Mint, Bhuskute also shared his views on markets and sectors.

Edited excerpts:

What are your expectations from the Budget 2025?

We expect the central government to prioritise macro stability by sticking to the fiscal consolidation path and will likely avoid populist measures.

This Budget is also set against the backdrop of slower domestic consumption and activity, which are likely to be the focus of the announcements.

We expect that some measures will spur job creation and private investment, which will have a multiplier effect on the economy.

Focus on public capex is also likely to continue, and the Budget should allow for healthy capex growth in railways and roads.

The FY25 deficit target of 4.9 per cent of GDP is on track to be achieved, and the FY26 target may be set lower at 4.5 per cent.

Going into FY27 and beyond, we do not expect the government to overachieve its fiscal deficit targets, which have been seen for the past three years.

Measures will prioritise demand support, employment generation, and ironing out capex capacity hurdles FY25 borrowings will be maintained, with FY26 gross dated borrowing of about ₹14-14.5 lakh crore and net borrowing at about ₹11-11.5 lakh crore.

Do you think a disappointment on the tax front can hit market sentiment?

India's growth has been slowing in the past year, and the government is expected to take some measures to address this slowdown.

Income tax slabs and income tax rates have not been moving in sync with wage growth, especially under the old tax regime.

There have also been growing talks about the government’s tight tax policy. Hence, we expect some relief to be announced on the income tax front.

However, it may not be a very large change. The fiscal space for income tax relief will be limited unless the government shifts away from the continuing capex focus.

Given the commitment to the 4.5 per cent fiscal deficit target, pursuing capex increases and income tax cuts will be difficult.

What sectors could be focused on in this Budget?

We may see a focus on consumption, particularly the “urban mass”, given the prolonged weakness seen in this sector and the contribution of this segment to overall economic growth.

The Budget may also attempt to revive the affordable housing segment further.

Capex-themed sectors will also be keenly watched after a period of weak government capex in the first nine months of FY25 (9MFY25).

What are the key medium-term triggers for the stock market?

The market will watch for global developments, particularly from the US, as a primary trigger for a near-term move.

A reversal in the dollar index and increasing allocation to emerging markets (which will benefit India) will be important short—to medium-term developments.

Comments and actions from the RBI (liquidity improvement, rate outlook) will also be closely watched.

The market will also be watchful of domestic triggers, including an improvement in the labour market, wage levels (rural and urban), a pick-up in private sector capex and an improvement in corporate earnings.

How do you see the US Fed interest rate trajectory from here on? Has the rate reduction cycle ended in the US?

With the US Fed already cutting rates by 100 bps, the real interest rate has moved much closer to the neutral zone.

Further, with the last mile of disinflation towards 2 per cent already looking like a challenge and growing geopolitical uncertainties around Donald Trump’s election victory, further rate cuts in the US are looking increasingly difficult.

Further rate cuts in the US will happen only when unemployment starts surging again, along with slowing growth conditions.

When can the rate cut cycle start in India?

With the height of geopolitical risks and uncertainty surrounding Trump’s policies, currencies worldwide have been under considerable pressure. 

In this light, we are a little cautious about the start of the rate-cut cycle in India. However, with growth also slowing down materially in Q2FY25 and recent high-frequency indicators continuing to be weak, there is a growing chorus for RBI rate cuts to support the economy. 

The fall in vegetable prices in December-January has also made the inflation outlook comfortable. In this context, the market has positioned itself for a possible rate cut in February's RBI policy.

What sectors look attractive to you at this juncture?

The business cycle since 2021 has been primarily driven by a combination of the government’s focus on capex, surplus savings from the pandemic, and reasonably elevated credit growth.

We believe this trend will normalise as we move forward. Therefore, we are focusing on increasing allocations to sectors with a more consistent growth profile, such as IT, healthcare, and FMCG. 

Further, we also favour the financials at the current juncture as valuations are fairly comfortable and asset quality trends remain stable.

What should be our investment strategy for mid and small-cap segments?

Mid and small-cap segments have outperformed the large-caps by a significant margin over the last three to five years, and they generally do so in the early part of the business cycle. 

As we move to the later part of the cycle, we expect some of that outperformance to be returned. 

This will lead to higher volatility in these segments. However, that should not worry the long-term investors for whom we believe such volatility will be par for the course and may eventually provide an opportunity to increase their allocations to some of the great mid and small-cap companies.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.