Economic vision, political theme key aspects to watch in Budget: Nomura

Amid growing concerns on higher social sector spends, Nomura's Nandi reminded all about Finance Minister Nirmala Sitharaman's recent statement on saturation levels being reached on that subject

The new government's economic vision and management of the "political theme" will be among the key aspects to watch in the upcoming Union budget, a Japanese brokerage said on Thursday.

The brokerage said the second half of the year will see "muted returns" on the equities front, and reiterated its year-end target of 24,860 points on Nifty, which is only about 3 per cent higher than the current levels.

The fiscal glide path beyond FY26, when the government has committed to reduce the fiscal deficit to 4.6 per cent, will also be a key theme to look at, Nomura's India Economist Aurodeep Nandi told reporters.

Reminding of the 100-day programmes of the new government prepared by various ministries ahead of the elections, Nandi said getting some idea of the economic vision of the new government will be a key area to watch.

After the election setback, the "political theme" of the budget by the new government dependent on coalition partners will also be keenly watched, he said.

Specifically, how the new government manages the demands from Bihar and Andhra Pradesh - the home base of allies Janata Dal and TDP, respectively - will be watched, Nandi said.

The allies are making demands, Nandi said, adding that heeding to those can lead to more borrowing, more direct transfers to citizens and also higher spends on infrastructure in pockets.

Amid growing concerns on higher social sector spends, Nandi reminded all about Finance Minister Nirmala Sitharaman's recent statement on saturation levels being reached on that subject, and added that there is no fiscal risk on account of that.

He said the government has over-delivered by reducing the fiscal deficit to 5.6 per cent in FY24 as against the budgeted 5.8 per cent, and also has the comfort of the record Rs 2.1 trillion of dividend from the RBI.

The final budget can also opt for reducing the fiscal deficit marginally to 5 per cent from the interim budget target of 5.1 per cent, he said.

Nandi said the government may also look at helping consumption in the economy, and pointed to recent reports suggesting a relook in income taxes.

Additionally, the government's handling of the "manufacturing theme" will also be keenly watched, he said, adding that this can include increasing outlays and also expanding the production linked incentives scheme to electronic components.

On the equity markets front, the brokerage's head of equity research Saion Mukherjee said narratives are driving the market at present and most investors are not too bothered by the concerns on valuations.

The current rally is completely fuelled by domestic money, and the foreign investors are on the sidelines, he said, adding that higher IPO activity in the second half of the year can help.

Higher IPO activity will reduce the valuations, he said, explaining that at present, a higher quantum of money is chasing limited set of options and as the options increase, it will go to other scrips and help get some sanity.

The foreign investors are chasing newer themes like artificial intelligence and the surge in Japanese markets, it said.

Mukherjee said the brokerage is overweight on financial stocks, capital goods and power, and underweight on auto and consumer discretionary sectors.