- Infrastructure spending will stay front‑and‑center, but growth may come from defense and renewable power projects.
- FY25’s slowdown to 6.4% hints at a brief dip before FY26‑27 rebounds to 6.5‑6.8%.
- Direct‑tax reforms are likely on pause, raising the risk of a fiscal‑deficit slip.
- Capex is set for high‑single‑digit to low‑double‑digit growth, with defence allocations potentially double‑digit.
- Investors should tilt toward power, roads, water, and data‑centre equities while watching CPI‑linked bonds for safety.
You’ve been overlooking the budget’s quiet cues—and that’s costing you returns.
Why India's FY27 Budget Focus on Infrastructure Matters for Your Portfolio
India remains the world’s fastest‑growing large economy, and the Union Budget continues to treat infrastructure as the engine of that growth. While headline‑grabbing reforms have stalled after last year’s sweeping tax changes, the government is expected to allocate a modest but steady rise in capital expenditure (capex) for FY27. The emphasis will shift toward power generation, roads, water, sanitation, and public‑private partnership (PPP) models.
For investors, this means a re‑allocation of private‑sector funding toward sectors with strong pipeline projects. Power and renewable companies stand to benefit from new transmission lines and data‑centre power‑capacity deals, while construction firms involved in road‑building and water‑infrastructure will see order‑book upgrades. Historically, each time the Indian government boosted capex in the early 2010s, the NIFTY Infrastructure index outperformed the broader market by 2‑3 percentage points.
What the Slowing FY25 Growth Signals for Sector Allocation
FY25’s projected 6.4% growth—its weakest in four years—reflects subdued private investment, a manufacturing slowdown, and external headwinds such as US‑India trade frictions. This dip is not a structural break; it’s a temporary lag that historically precedes a rebound when fiscal stimulus returns.
Sector‑wise, manufacturing and EPC (Engineering, Procurement, Construction) firms saw muted order flow, but power, renewables, and data‑centre developers have recently shown a resurgence. The pattern mirrors the 2018 cycle, when a brief contraction in manufacturing was followed by a surge in infrastructure spending, lifting logistics and utility stocks.
Taxation Outlook: Why Direct Tax Reforms May Stay Dormant
After a blockbuster personal‑income‑tax overhaul in FY25, the finance ministry appears to be on a reform‑pause. Direct‑tax collections are lagging behind budgeted targets, raising concerns over a possible shortfall. The risk is two‑fold: lower revenue could pressure the fiscal deficit, and a stagnant tax code may deter high‑net‑worth investors seeking clarity.
For the average investor, the practical impact is modest—no immediate changes to tax slabs or corporate tax rates. However, the absence of further rationalisation suggests the government will rely on capex‑driven growth to meet its deficit target of 4.4% of GDP, rather than expanding the tax base.
Capex Outlook: From Moderate Rise to Defense‑Driven Surge
Overall capex for FY27 is projected to grow in the high single‑digit to low double‑digit range. Defence spending, in particular, could see a double‑digit jump, fueled by the Defence Acquisition Council’s approval of projects worth roughly ₹3.8 lakh crore for the calendar year 2025.
When defence budgets swell, ancillary sectors—steel, aerospace, and specialized engineering—benefit from spill‑over effects. In the early 2000s, a similar defence‑led capex expansion lifted the NIFTY Defence index by over 15% in two years, creating a tailwind for related supply‑chain stocks.
Fiscal Deficit Warning: How Weak Tax Collections Could Ripple Through Markets
Even with disciplined spending, the fiscal deficit could slip marginally if tax collections remain below expectations. Higher interest costs and a growing reliance on RBI dividends amplify this risk. A widening deficit often leads to higher sovereign bond yields, which can compress equity valuations, especially in rate‑sensitive sectors like real estate and financials.
Investors should monitor two key indicators: (1) the month‑on‑month change in corporate and personal tax receipts, and (2) the RBI’s dividend payout trend. A sustained shortfall could push the government toward short‑term borrowing, nudging the yield curve upward.
Investor Playbook: Bull vs. Bear Scenarios
Bull Case: If the government delivers on its capex promises, especially in power, roads, and defence, earnings growth for sector leaders could accelerate 12‑15% YoY. Coupled with stable fiscal discipline, equities in these segments may outperform the market by 4‑6% over the next 12 months.
Bear Case: Should tax collections falter and the fiscal deficit widen beyond 4.6% of GDP, the risk premium on sovereign debt could rise, pressuring equity valuations across the board. Defensive sectors—consumer staples, utilities, and high‑quality bonds—would likely hold up better, while high‑growth infrastructure names could see a 5‑8% correction.
Strategically, a balanced approach that leans into infrastructure and defence‑linked equities, while keeping a hedge in high‑quality sovereign bonds, aligns with the expected macro backdrop of FY27.