Markets don't hold their breath for budgets

The Union Budget, the annual unveiling of India's fiscal roadmap, is always met with a flurry of anticipation. Yet, despite widespread excitement, markets approach the event with tempered expectations. That caution is often justified.

The median returns for all but two sectors have been negative in the month preceding the budget, revealed a Mint analysis of 17 key sectoral indices on the BSE over the past 20 budgets (including interim budgets in election years).

Real estate suffered the most, with a near 6% median decline during the period. The oil and gas, and power sectors fell 4.3% each. And the pre-budget market downturn is frequently reflected in wider market performance.

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On average, sectoral indices fell in about 65% of the 20 budgets announced since 2009 in the month preceding the event. Even the benchmark Sensex rose ahead of the budget in only five of those instances.

The data suggests that market participants are hesitant to price in sector-specific expectations. The absence of consistent positive returns in any particular sector reinforces this view, indicating that these expectations often do not align with outcomes.

The post-budget impact on sector performance is also fleeting, according to experts, as it seldom lasts more than a week. So attributing changes in sectoral returns in the following month exclusively to the budget would not be accurate.

For instance, in 2017-18, the government reduced the basic customs duty on liquified natural gas imports by 50% to incentivize liquified petroleum gas (LPG) production in the country, offering a marginal boost to the oil and gas sector that year. While the sector was already up nearly 7% in the month preceding the budget, it saw a relatively modest increase of 3% one month after it.

The improvement in sentiment was momentary because even though the government announced several measures to boost both demand and supply of natural gas in the country in the 2016-17 and 2017-18 budgets, it did little to address structural issues like deficiencies in targeting and delivery of LPG subsidies to the poor, Teri had pointed out in its review then. This moderated the market’s expectations of LPG demand in the country, along with the benefits that city gas distribution companies could have possibly received from such measures.

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Similarly, the automobile industry was already facing demand headwinds and reeling under high goods and services tax (GST) pressure in 2019. Hence, a month ahead of the interim budget, the sector was already down almost 6%. While the government announced several measures to promote the electric vehicle ecosystem in the country, there were no specific proposals to pull the broader industry out of its cyclical downturn. Hence, the index fell 13% in the month following the budget, as the auto sector continued to deal with its own issues with little help from the budget.

A coincidence?

Two sectors, however, have defied the pre-budget trend. Information technology and teck (which tracks the performance of media & publishing, IT & telecommunications sectors) have returned median gains of 2.3% and 0.1%, respectively, ahead of budget. That, however, likely stemmed from unrelated factors.

“Since US and European companies announce their IT budgets in the first two months of the year, IT and tech stocks tend to outperform during the Budget months," said Siddhartha Khemka, head of research of wealth management at Motilal Oswal Financial Services.

Still, expectations from the upcoming Union Budget are running high. While India's technology sector is more sensitive to global trends, experts hope the current budget will provide increased government support for data centres and digital infrastructure development.

“If the government wants to bolster India's position as a global AI leader, it should double down on data centre developments," said Bharat Chadha, partner at Uniqus Consultech. “They should tweak existing PLI (production-linked incentive) schemes to incentivize R&D in deep tech and AI."

Chadha hopes for tax breaks, access to low-cost land, energy subsidies, and increased private-public partnerships to foster a strong tech ecosystem in the country.

Such announcements could benefit mid-cap IT and teck stocks. However, these expectations are not currently reflected in the performance of these indices, as both IT and Teck are respectively down 5.1% and 3.5%, year-to-date. In fact, most other sectoral indices have also fallen 3-19% this year ahead of the 2025-26 budget. This is largely due to the broader market correction that began last September.

Pure plays

Some segments, like defence, railways, and infrastructure, have typically performed well ahead of the budget due to government support and spending. However, these sectors have seen little traction recently. The Nifty Defence, Railway, and Infrastructure indices are all down 4-10% so far in 2025.

“The caveat is that defence and railway stocks had already run up a lot last year and, hence, are now 20-30% down from their peaks," explained Kratnhi Bathini, director of equity strategy at WealthMills Securities.

Low government spending resulted in tight order book inflows for defence public sector undertakings (D-PSUs) for most of FY25. Their own execution issues, compounded by low government spending, triggered a massive correction in D-PSU stocks from their July 2024 peak.

Similarly, the Indian railways has utilized only 76% of its allocated FY25 budget till December 2024, while the government’s actual capital expenditure for FY25 is expected to be around 11% lower than the budgeted estimate of ₹11.1 trillion.

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“The market is more interested in the level of execution rather than the announcements. With low government spending in FY25, expectations are modest from the FY26 budget," said Mahesh Patil, chief investment officer at Aditya Birla Sun Life AMC. “Tight liquidity, global uncertainty and the ongoing correction has resulted in lower expectations going into the budget which can be a positive setup for the market if the budget offers some measures to stimulate the demand side."