Weekly Wrap

From Capex to Consumption: India's New Growth Formula Amid Global Headwinds

The government's strategic pivot marks a fundamental shift in economic policy, moving away from the traditional model of heavy infrastructure spending and capital-intensive investments. Instead of relying primarily on expanding industrial capacity and accelerating infrastructure projects, policymakers are now channelling resources toward stimulating consumer spending and domestic demand. This transformation reflects a growing recognition that sustainable economic growth requires a robust consumer base along with infrastructure improvements.

In a landmark fiscal measure designed to uplift the nation's backbone - its middle class - the government has graciously extended the tax-free threshold to a remarkable ?12.75 lakh (individual-salaried taxpayers) under the new tax regime. This magnanimous gesture translates into an unprecedented infusion of ?1 lakh crore into the hands of middle-class households nationwide. Such a substantial enhancement to disposable income promises to invigorate the marketplace, mainly benefitting the fast-moving consumer goods sector and durable goods manufacturers, as families find themselves empowered to fulfil their essential needs and aspirational purchases with renewed confidence.

The budget's emphasis on consumption-oriented measures, coupled with a relatively modest increase in capital expenditure allocation, signals a shift in focus from strengthening fiscal multipliers through capex to prioritizing immediate economic gains. The government is banking on rekindling animal spirits and encouraging the private sector to take the lead in investments by prioritizing consumption growth and strengthening the health of the agriculture sector.

With the immediate impact of the budget priced in, markets will now shift their focus back to global cues, closely tracking movements in international cues from equity, bond, and currency markets.

Investors were lulled into a false sense of security when he refrained last week from immediately imposing tariffs on major trading partners, including China immediately after taking an oath of the office.

Global markets face significant turbulence following U.S. President Donald Trump's announcement of new tariffs: 25% on Canadian and Mexican imports, and 10% on Chinese goods. U.S. markets have fallen sharply in response, potentially setting the stage for a volatile time for global equities. Canada has swiftly retaliated with its own 25% counter-tariff on U.S. goods, affecting trade worth over $100 billion.

The dollar has strengthened considerably against major currencies, with the Canadian dollar dropping to its lowest level since 2003 and the euro continuing its downward trend. This dollar rally reflects market expectations that the tariffs will boost inflation and maintain elevated U.S. interest rates. Additionally, investors believe these measures will impact foreign economies more severely than the U.S., enhancing the dollar's appeal as a safe-haven currency.

The Fed held interest rates steady this week, as expected, as core PCE remains above the 2% target The Federal Reserve maintained steady interest rates this week, an anticipated move given that core PCE remains above the 2% target and the pace of disinflation has moderated.

The budget's emphasis on consumption-oriented measures, coupled with a relatively modest increase in capital expenditure allocation, signals a shift in focus from strengthening fiscal multipliers through capex to prioritizing immediate economic gains. This shift has particularly benefited FMCG and automotive sectors, following significant adjustments to personal income tax structures.

Foreign portfolio investors maintained their exodus from Indian equities, marking their 22nd consecutive session of selling on the budget day.

With budget-related movements now largely priced in, market attention is returning to global factors. Additionally, all eyes will be on the Reserve Bank of India's (RBI) policy meeting scheduled for February 7th. Market participants will be keenly watching for any signals regarding RBI’s stance on the interest rate decisions, inflation outlook, liquidity management, and the economic growth.

Indian equity markets have witnessed a notable correction in recent months, lagging behind their global counterparts amidst concerns over valuation and economic growth headwinds.

The current market pullback presents selective opportunities as domestic economic indicators show green shoots of recovery, with improving manufacturing activity, credit growth, and consumption patterns. While a sharp V-shaped recovery may be unlikely in the near term, the market appears to be forming a base at current levels, potentially setting the stage for steady appreciation over the longer horizon as fundamentals strengthen.