Will These Sectors Drive India’s Growth Story in FY 26?

As the calendar turns toward February 1, all eyes are on Finance Minister Nirmala Sitharaman, who is set to unveil the Union Budget 2025. As we edge closer to 1st, it is important to focus on the areas the Modi 3.0 Government will most likely prioritise, as these decisions will shape the future direction of India's economy.

1. Pharmaceutical Industry: A Prescription for Growth

India’s pharmaceutical exports have shown consistent growth, reaching nearly $28 billion in FY24. The total market size of the Indian Pharmaceutical Industry is projected to grow to US$ 130 billion by 2030 and further expand to US$ 450 billion by 2047. (Source: IBEF Report)

• What to Watch: Stocks in companies focused on biosimilars, biologics, and drug discovery could benefit from increased budget allocations toward innovation and R&D incentives.
• Key Players: Look for companies with strong pipelines in advanced therapies or those investing in global expansion.
• Actionable Insight: Diversify into pharma firms with exposure to export markets and government-backed research projects, as these are poised for higher margins.

2. Agriculture: Modernization to Drive Growth

Agriculture supports almost half of India’s population and remains a cornerstone of the rural economy. The sector’s budget allocation has grown exponentially in the last decade, signalling its critical role in economic stability.

• What to Watch: Companies dealing in agri-tech, precision farming tools, and rural infrastructure could gain from enhanced funding for modernization.
• Key Players: Look at firms providing AI-powered farming tools, cold storage infrastructure, and efficient irrigation systems.
• Actionable Insight: Investments in agri-focused companies with innovative solutions could yield steady returns, especially with climate-resilient policies in focus.

3. Infrastructure and Roads: Expanding the Nation’s Backbone

India’s infrastructure sector continues to be a major driver of growth. The government targeted 12,000-13,000 kilometres of national highways for construction in FY24. For the fiscal year 2024-25, Finance Minister Nirmala Sitharaman set aside a significant budget of ?11.11 lakh crore. Under Prime Minister Narendra Modi's leadership, there is an anticipation of increased financial commitment to the infrastructure sector.

• What to Watch: Companies in the construction sector, green energy solutions, and digital project monitoring stand to benefit from the government’s focus on sustainable and tech-driven infrastructure.
• Key Players: Focus on firms with contracts for large-scale projects under Pradhan Mantri Gram Sadak Yojana (PMGSY) or those innovating in green materials.
• Actionable Insight: Infrastructure ETFs or stocks of companies in road and highway development could see value appreciation as allocations increase.

4. Railways: A New Track for Profitability

The Indian Railways, a critical player in both mobility and logistics, is set for transformative growth. Increased electrification and local manufacturing initiatives will boost efficiency and reduce dependence on imports.

• What to Watch: Stocks of rolling stock manufacturers, locomotive suppliers, and freight-focused companies could see upward momentum.
• Key Players: Companies involved in Make in India initiatives and electrification projects may benefit from tax incentives.
• Actionable Insight: Long-term investors should consider companies aligned with railway electrification and freight optimization, as they are likely to gain from policy support.

5. Consumer Goods: A Revival in Spending

Inflationary pressures have impacted rural and middle-class spending, but targeted measures in the budget could reverse this trend. Expect policies to curb costs and boost consumption.

• What to Watch: The FMCG sector and consumer durables companies will be influenced by tax relief measures and rural development allocations.
• Key Players: Firms with a strong rural distribution network or those sourcing locally may benefit from reduced input costs.
• Actionable Insight: Consumer goods companies with a balanced exposure to rural and urban markets are good picks as consumption rebounds.

6. Defence Sector: Reforms and Expansion Ahead

India’s defence sector is gearing up for a transformative phase, with 2025 being declared the Year of Reforms. With increased funding, expanding defence budgets, and a push toward self-reliance, the sector is poised for significant growth. The government aims to increase defence exports to ?50,000 crores by 2028-2029, signalling a strong push towards global competitiveness.

• What to Watch: Companies focusing on advanced defence technologies, including AI, machine learning, and space systems, could see substantial benefits from the government's emphasis on innovation and self-reliance.
• Key Players: Look for companies like Bharat Electronics, Hindustan Aeronautics, and Mazagon Dock, which are leading in defence electronics, aircraft manufacturing, and shipbuilding. These players are set to capitalize on both domestic demand and global export opportunities.
• Actionable Insight: Investors should consider diversifying into companies with strong R&D capabilities, government-backed projects, and global expansion strategies. These firms are well-positioned for higher margins as India's defence sector grows.

Sector Analysis: A Backtest on Past Performance?

Now let’s run a little backtest to try and test out how these sectors have faired in the stock markets post-budget announcements in the past. We will track the 3-month performance for better analysis.?

For this, we will use sharpely’s tool– seasonality analysis. It gives you a bird’s eye view of a stock/sector’s performance up to the past 10 years. We selected the period as February 1st to May 1st (since most of the budgets are around those dates) and we checked the data for the past 10 years. Here are the results:

As we can see the Pharma sector, Healthcare sector, FMCG sector, and Consumption sector have a phenomenal track record of at least 70% winning trades. This further supports the case that sectors discussed in the article above have a strong chance of showing positive returns.?

However, it’s important to note, that like any other strategy, this has its limitations. The first is that the median returns aren’t that high. Second, 10 trades is still a low number to gauge the possibility of a winning scenario this time, too. And third, there were still 3 times when the sector posted negative (or losing trades.)

Which sectors are on your radar? Drop your thoughts in the comments below.