For decades, India’s salaried class viewed themselves as a minority—sandwiched between the elite and what they believe is the world’s largest population of the “politically pampered”. And in most Budgets, they found the discourse to be dominated by farmers, the poor, women and other groups.
Which is why the record ₹1 trillion largesse showered by Union Budget 2025-26 on middle-income earners appears to be a veritable mini-revolution in recent policymaking. It can also be a sizeable opportunity for equity investors—if they play their cards right.
Double-engine benefit
A key characteristic of Indic thought is the multiplicative intensity of morals. Do good, and it will compound in abundance in your Karmic ledger. Curiously, the same principle finds resonance in economics.
When finance minister Nirmala Sitharaman announced tax rebates making income of up to ₹12.75 lakh tax-free and savings for those above this threshold, she not only delivered a cash transfer of ₹1 trillion from the state exchequer to the common man but set in motion a virtuous cycle, which will culminate in the economy benefiting by a sum much higher than the original stimulus.
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How? Through something called the Marginal Propensity to Consume (MPC).
The MPC measures the proportion of additional income an individual spends on consumption. In simple words, if the tax rebate puts an additional ₹50,000 in your hands, and you spend ₹30,000 of that money on gadgets and eating out, your MPC is 0.6, as you have spent 60% of the additional income.
Your additional spending has put extra money in the pockets of others as well, such as those working at the companies you bought goods and services from. And they, too, will spend their extra income according to their MPC levels. And so on.
All this leads to a multiplying effect thanks to what economists call the ‘consumption multiplier’ (measured as 1 divided by 1-MPC). If the MPC is 0.6, the consumption multiplier works out to be 2.5. This means a tax break of ₹1 trillion would generate an economic impact of ₹2.5 trillion.
Just how much is the average Indian consumer’s marginal propensity to consume? Exact numbers will be hard to come by, but various experts have put it in the range of 0.5 and above.
In a post-Budget report, India’s largest lender, SBI, estimated it at 0.7.
“Our analysis finds that this new tax structure would benefit approximately of total 5.65 crore (56.5 million) taxpayers (above ₹4 lakh tax slab) with total tax savings amounting to majestic ~ ₹1 lakh crore ( ₹1 trillion) with maximum benefits accrued to people in 8-12 lakh income bucket.
“Using marginal propensity to consume 0.7, we estimate that this tax savings would lead to a consumption boost of ₹3.3 lakh crores ( ₹3.3 trillion) by spurring disposable income, thus significantly stimulating economic activity. This will ultimately contribute to a more vibrant economy, encouraging sustainable growth and improving overall economic well-being,” it said.
Market experts say some sectors stand to be clear winners of this massive windfall.
“Discretionary spends (non-food accounts for ~65% share of urban household consumption) could see a large extent of the benefit as incremental income will be spent on upgrading lifestyle (like eating out, autos, home improvement, travel, fashion, etc.), while capital market plays can be a second-order beneficiary,” Siddhant Chhabria, research analyst and fund manager, Mirae Asset Investment Managers (India), told Mint.
Moreover, despite the economic compulsions, the finance minister has stood on the path of fiscal consolidation as the fiscal deficit for FY26 is pegged at 4.4%, which is 10bps lower than the requirement of a glide path.
“This should benefit the bond market, strengthen India’s case with sovereign rating agencies, and open up room for monetary accommodation, allowing the RBI to embark on a rate cut trajectory,” Chhabria added.
Lower interest rates from the RBI will act as a second wind in the sails of the auto, real estate and consumer durables sectors.
Now, here comes the fun part.
Even the portion of the extra income not spent on consumption and saved is likely to boost the stock market. That is because first-time earners (who would form a considerable chunk of the ₹12.75 lakh income bracket) have a marked preference for equities compared to traditional savings instruments like fixed deposits.
According to a recent report by Fin One, a digital-first project by Angel One Ltd, 93% of young adults regularly save money, with many reserving 20-30% of their monthly income for future financial objectives. Not only that, 45% of respondents said that stocks were their preferred investment choice over more conventional options like gold and fixed deposits, as per a report compiled by leading research firm Nielsen.
This enthusiasm is corroborated by other capital market participants as well.
The unique registered investor base at India’s biggest exchange NSE ended 2024 at 109 million investors, and crossed the 110 million milestone on 20 January, growing more than 3.5x in the last five years and nearly 7x in the last 10 years.
The new investors entering the market reflect a significant demographic shift. Today, the median age of these investors is around 32 years, with 40% of them under the age of 30. This is a marked change from just five years ago, when the median age was 38, highlighting a growing interest in the stock market among younger investors, the NSE said.
Capex conundrum
Taxpayers received some much-needed good news. Domestic consumption, the main driver of India’s GDP, got a boost. The fiscal consolidation trajectory was intact, with the government not only managing to achieve a fiscal deficit of 4.8% of GDP in FY25 against the budgeted 4.9% but also setting a lower target of 4.4% in FY26.
So, why was the market so unimpressed by the Budget?
The answer lies in one of the most keenly tracked macroeconomic metrics in recent years: capital expenditure.
The Centre has budgeted a capex of ₹11.2 trillion for FY26, up 10% compared to the revised estimate for FY25, but this is in nominal terms. When factoring in inflation, the capex spending is far lower than what is needed to hit the aspirational GDP growth range.
At a time when global investors are betting on the China + 1 theme of supply chain relocation, any slack on the infrastructure creation front would hardly inspire confidence.
Even if we factor in the Centre’s grants in aid for creation of capital assets, the overall budgeted capex of ₹15.4 trillion in FY26 represents 3% growth over FY25’s BE of ₹15.01 trillion.
Dalal Street, needless to say, was expecting more.
Not just that; out of the budget estimate of ₹11.1 trillion of capex in FY25, the revised estimate was lower, at ₹10.18 trillion, which the finance minister attributed to disruptions due to the general elections.
Some analysts see the government missing its capex targets once again in FY26. Is the North Block signalling that the private sector has to pick up its capex pace?
“The capital expenditure allocation in the Budget remains a key indicator of economic growth potential. If the government is signalling a shift towards private sector-led investments, it implies confidence in business sentiment and economic recovery. This could lead to opportunities in banking, capital goods, and infrastructure-linked plays, where private investments are crucial for sustained growth,” Sonam Srivastava, founder and fund manager at Wright Research PMS, told Mint.
“Investors should focus on companies with strong balance sheets and execution capabilities, as these firms will be better positioned to capitalize on private capex cycles. Additionally, increased emphasis on sectors like renewable energy and digital infrastructure may open up new investment themes,” Srivastava added.
Value vs valuation
Positioning oneself in attractive sectors without taking into account the other end of the investing equation—valuations—is the perfect recipe for disaster.
If the recent correction in some high-vaulting market darlings has taught us anything, it is that any sectoral opportunity must necessarily be viewed through the prism of valuations.
Take shipping, for example. The sector was a prominent winner in this year’s Budget, with a slew of announcements, including a revamped Shipbuilding Financial Assistance Policy, development of shipbuilding clusters and other policy measures to give a fillip to the ecosystem.
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Shipping stocks were among the top winners on Budget day but gave up the gains the very next session. Leading shipping stocks like Shipping Corporation of India, Mazagon Dock, Garden Reach Shipbuilders, Great Eastern Shipping and others are currently trading around 30-50% below their 52-week highs, having succumbed to ferocious bouts of profit booking after the recent frenzy over shipping, railways and defence names.
Similarly, while consumer staples demand is expected to improve this year, especially in urban areas, many FMCG majors are trading at earning multiples that would make Masayoshi Son blush.
“Caution is warranted in sectors that have already seen excessive speculative run-ups, such as new-age tech and highly leveraged businesses, where valuations might be difficult to justify unless backed by sustained earnings growth,” Srivastava said.
“Shipbuilding, defence, and related sectors have already seen significant re-ratings, driven by strong order books and a policy push for self-reliance. While the budget may provide further tailwinds, the key question for investors is whether earnings can justify current valuations,” she added.
Shipbuilding, defence, and related sectors have already seen significant re-ratings.
— Sonam Srivastava
Other analysts, too, have flagged the skewed risk-reward in many pockets of the market. The recent correction, too, has not made the maths very favourable.
“We find current valuations across most consumption and investment stocks to be quite ‘rich’ compared to their history, with hopes of varying degrees of recovery in volumes and/or increase in profitability embedded in their present value,” analysts at Kotak Institutional Equities said in a note dated 3 February.
US President Donald Trump’s tariff flipflops have added to the global uncertainty, which may also delay the expected recovery in global IT spending and weigh on the prevailing high valuations of the sector.
“Only the banking sector appears to be reasonably valued in the current context. Meanwhile, narrative stocks remain frothy, despite the recent sharp correction, especially in the context of a large reset in the capex narrative,” Kotak added.
Stable macros, a shot-in-the-arm for domestic consumption, and attractive sectoral opportunities are all valid investing rationales. But if you jump headlong into the market without taking into view factors like valuations, time horizon and your risk appetite, that would be a sin, and even the Maha Kumbh would not be able to wash away.
