Highlights

Fiscal consolidation journey continues

• Fiscal deficit target was set at 4.9% of GDP for the fiscal year 2025, lower than the interim budget’s 5.1% target earlier this year.
• Both total revenue and expenditure estimates were budgeted fractionally higher compared to the interim numbers, while net market borrowing was reduced.
• The additional dividend of ~Rs. 1.1 trillion (US$13 billion) from the Reserve Bank of India might have allowed the government to increase the allocation towards rural and social welfare schemes without cutting government capex. This has been in line with our expectation. While we could not extract the exact numbers from the budget documents, the dividend was partially used to support government spending and partly used to speed up fiscal consolidation.

Capex allocation for infrastructure development

• Overall central capex support was maintained at ~Rs. 11.1 trillion (3.4% of GDP) for fiscal 2025, up 17% year-on-year from FY24 revised estimates as the government reiterated its fiscal support for infrastructure over the next 5 years whilst balancing consolidation priorities.
• Allocation to core ministries such as roads, railway, and defence were broadly unchanged compared to interim budget, while there was an increase in allocation to housing and rural road schemes.
• Special assistance to states was raised from ~Rs. 1.3 trillion in the interim budget to ~Rs. 1.5 trillion, a hike of 42% from the revised FY24 numbers. This stronger support was evident from the Budget speech, which focused on a few states like Andhra Pradesh and Bihar.
• The government has been supporting domestic capex with capital outlay growth of 10% between FY19 and FY25. This year, the growth was lower than expected with a clear focus on fiscal consolidation. We would be closely watching private capex ramp-up.

Consumption, rural demand, employment – plugging the gaps

• We view this Budget as one that is aimed at fixing gaps in the economy with spending increases directed towards agriculture, rural micro, small and medium enterprises, and housing.
• The government announced five schemes and initiatives to facilitate employment, skilling, and other opportunities for 41 million youth over a 5-year period with a central outlay of ~Rs. 2 trillion. There were also employee-linked incentives, such as tax saving contributions, direct transfers, and the allocation of more resources for schemes benefiting women and girls.
• Farmers also received support with agriculture reform through R&D to increase productivity and formalising farmers’ data, alongside more funds for the overall sector, whilst both urban and rural consumption were also emphasised in the budget.

Tax reforms and changes on the table

• There was relief for taxpayers as the standard deduction for salaried individuals under the new tax regime was increased.
• Increases in capital gains taxes were also announced: short-term taxes (<1 year) rose from 15% to 20%, while long-term taxes increased from 10% to 12.5%. Investors often react to tax changes based on their perception of how it will affect their returns and investment strategies, which in turn can influence market sentiment and short-term market movements. While the increase in short-term and long-term capital gains taxes might hurt market sentiments in the short term, it is unlikely to impact the long term outlook for the Indian markets.
• There was also a near-doubling of the tax on equity derivatives trading, as the securities transaction tax on futures and options were raised.

Influence of a coalition government is visible

• The Budget made special allocations to Bihar (roads, power plants, etc.) and Andhra Pradesh (irrigation, development of a capital city) – both states are key coalition partners for the BJP.
• We call this a “silent” capex allocation as it only offsets the higher allocation from states such as Andhra Pradesh to meet their election subsidy commitments.

Portfolio impact

• Consumption: While the budget’s focus was around fiscal consolidation, there were also enough measures announced to boost both urban middle class consumption and rural demand. This bodes well for our consumer staples and consumer discretionary names. We have seen varied rates of recovery with premium-end demand still looking decent, and abrdn New India Investment Trust is well-positioned to benefit from structural tailwinds in areas like tourism, jewellery, and premium cars. For example, we have been positioned in names including one of India’s top automakers, Mahindra & Mahindra, premium jewellery brand Titan and Indian Hotels. The budget also saw an unexpectedly sharp reduction in customs duty on gold and silver, which should bring much-needed relief to domestic gold prices and is likely to benefit organised retailers. Our staples names should benefit from an uptick in rural consumption demand.
• Infrastructure capex: We hold investments in both infrastructure and industrials names such as Siemens Ltd and ABB India, as well as ancillary names like cable and wire manufacturer KEI Industries. While our holdings have good corporate balance sheets and are expected to continue benefitting from capex-related tailwinds, we will closely monitor private capex in the coming months.
• Power: The budget put an emphasis on thermal power plants, pump storage and renewable energy. We are well positioned here through our core holding in Power Grid Corporation of India.
• Real Estate: There were several housing support schemes for which we are positioned with our holding in a quality housing finance entity. Elsewhere, the indexation benefit has been removed, and long-term capital gains tax (LTCG) rate has been reduced from 20% to 12.5%. Indexation is a cost escalation matrix where, for example, a real estate investor had to pay a higher LTCG tax rate based on gains made after factoring in inflation. Now, they would pay a lower LTCG tax rate but on all gains made on an asset without accounting for inflation. The impact of this move is still uncertain. Hence our positioning in real estate is focused on players catering to multiple markets and multiple asset types – retail, official, and residential, among others – such as Godrej Properties and Phoenix Mills. The cement sector is expected to also be driven by potential demand in rural and urban housing, and we hold a high conviction name in this space, and we are also well positioned on other ancillary names that will benefit from real estate tailwinds.
• Financials: The Indian capital market regulator has been indicating caution around equities. Within that context, the increased taxation on equity derivatives trading, however, does not appear to be that steep, or substantial. While there could be some near-term correction, we are well-positioned to capture the under-penetration story with KFin Technologies. We also have other interesting pipeline ideas under evaluation. Meanwhile, our private banks are set to benefit from consumption-led demand growth whilst stimulus for MSME (Micro, Small, and Medium Enterprise) lending would likely help our non-bank lenders.

Outlook

India is one of the world's fastest-growing major economy, backed by a resilient macro backdrop which includes a real estate boom, strong consumer sentiment in urban areas and a robust infrastructure capex cycle. Expectations around a good monsoon season would be key for a pick-up in rural demand. The growth story is underpinned largely by supportive policies from the central government as well as a decade of painful but necessary economic reforms. The groundwork laid by these sweeping reforms have put India on a positive economic trajectory. Following the latest election results, while Modi is now in a coalition government where big bang reforms may be relatively harder to pass in parliament, we do not think it de-rails the overall story about policy support underpinning the growth momentum. Still, India faces some near-term risks, most of which are external. These include potentially higher global energy prices and a slowdown in the world economy.

We believe our core quality holdings can continue to deliver resilient compounding earnings growth over the medium term, come what may in terms of macro conditions. The portfolio's consistency of earnings growth remains healthy and the fundamentals of our holdings, including pricing power, strong balance sheets and the ability to sustain margins, remain solid. Our conviction in the experienced management teams of these companies was affirmed during a recent trip to India where we met several companies to get more clarity about the situation on the ground.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. Authorised and regulated by the Financial Conduct Authority in the UK.

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