India's Billions: How Will They Be Spent?

This report is from the CNBC "Inside India" newsletter, which provides timely and insightful news and market commentary on the emerging powerhouse and the big businesses driving its rapid growth. If you find it interesting, you can subscribe here.

The big story

The outcome of India's general election will be revealed next week, showcasing its aftermath.

On Tuesday, India's finance minister, Nirmala Sitharaman, will reveal her seventh budget, which will provide insights into the BJP's political party's approach to working with its coalition government allies.

Since the recent general election results delivered a slimmer than expected win for Modi, there are high expectations for a "populist" budget.

According to Premal Kamdar, head of India equities at UBS Wealth Management, the upcoming budget is more significant than in previous years because it will reveal whether the election setback will affect the government's policy and priorities.

Modi has been compelled to collaborate with smaller parties, one of which represents India's poorest state of Bihar. The requirements from the diverse members of the unstable coalition could result in the government increasing spending on welfare programs. This is likely to result in increased borrowing.

Goldman Sachs' chief India economist, Santanu Sengupta, stated that the company believes it unlikely that both views will be pushed back against.

Policymakers may not be willing to give up on the growth created from infrastructure spend seen over the past few years, as they may be addicted to it.

Sengupta and team are considering the possibility that the deficit could decrease, rather than increasing government borrowing.

Evidence suggests that borrowing has decreased more than the budget has been targeted over the past four years. Bank of America analysts, who also believe the deficit may decrease, appreciate the finance minister's approach of underestimating and overperforming.

The Reserve Bank of India aided the government in balancing the books by writing a $25 billion check earlier this year, utilizing its surplus of over $200 billion in U.S. Treasurys and other securities.

Where will the government spend?

New Delhi's political winds are being closely monitored by Wall Street analysts.

Since collections have increased from 2% of GDP before the pandemic to 3% in 2023, many believe that a reduction in income taxes is long overdue. If no action is taken, it is predicted that the tax collection rate will rise to 3.5% in 2025, according to Goldman Sachs's estimates.

The consumer staples sector is likely to benefit the most from such cuts, aside from individuals.

If the government announces a consumption stimulus or increases tax exemption limits, a tactical opportunity could arise in the consumption space, triggering consumption demand, according to UBS' Kamdar.

This year, consumer spending-focused stocks held in funds such as Columbia India Consumer ETF have increased by more than 22%, outpacing the 14% rise of the benchmark index.

The listed subsidiary of U.K.-based multinational, which had appeared dormant, has recently experienced a surge in performance over the past few months. This company, known for its presence in India, owns a variety of brands such as cleaning agents Cif and Domex, Magnum and Cornetto ice creams, Horlicks drinks, personal care makers Dove, TRESemme, and Vaseline, among others.

According to a note to clients by Macquarie equity strategists Adity Suresh, the performance of Staples could improve due to the size and type of government stimulus for rural India in the budget.

"Currently, we believe that HUVR presents a better chance to capitalize on the potential increase in rural demand due to budget allocations."

Aastha Gudwani, Bank of America's India economist, predicts that the government will increase subsidies for health care coverage and manufacturing to boost employment.

Gudwani stated that to increase consumption, an effective tax rate reduction, higher subsidies for cooking gas, and interest rate reductions for rural and urban housing are expected.

"Despite appearing to be a significant amount of spending, the overall fiscal math is not concerning due to the substantial dividend received by the central government from the RBI and other Central Public Sector Enterprises."

Liked or disliked this story? Share your thoughts.

Need to know

The International Monetary Fund has revised its economic forecast for India, predicting a dip in growth in 2025 after a projected 7% growth rate in 2024.

Temasek, Singapore's sovereign wealth fund, plans to invest up to $10 billion in India over three years in the financial services and health care sectors as it shifts its focus away from China. India currently accounts for 7% of its assets, and Temasek stated that profits from investments in the United States and India are helping it mitigate the impact of underperformance in China.

Jay Chaudhry, an India-born CEO, shares how he left his job to launch $30 billion Zscaler. Chaudhry, who grew up in rural India and moved to the U.S. to study engineering, quit his day job at the age of about 39 along with his wife to invest their life savings into a cybersecurity software startup. After selling out for $70 million, Chaudhry started Zscaler in 2007, which is now valued at about $30 billion.

What happened in the markets?

The stock market in India has reached new heights, with the index surpassing 24,800 points for the first time. This week, the market is expected to gain 1.2%. The information technology sector, including companies like Tata Consultancy Services and Infosys, is driving the rally after exceeding earnings expectations.

The Indian government bond yield has decreased slightly to 6.96% in the past week. The government plans to sell $3.7 billion in rupee bonds on Friday, which may affect fixed-income markets.

According to Hiren Dasani of Goldman Sachs Asset Management, India could benefit from the trade spat between the U.S. and China in the semiconductor sector. The U.S. is reportedly considering imposing additional sanctions to prevent advanced chip-making capabilities from being shared with China. Dasani stated on CNBC's "Squawk Box Asia" that the trade barriers could also aid countries like India, which are attempting to establish a presence in the semiconductor value chain.

Polka Mishra of Javelin Wealth Management explained why she is optimistic about India's future. She expects $500 billion worth of infrastructure projects to be completed in the next two years, which is equivalent to the total investment over the past decade. "The scale and pace of development are both thrilling," Mishra stated.

What's happening next week?

All eyes will be on the Indian budget on Tuesday, July 23.

Shares of Indian food ingredient maker Sanstar will begin trading on July 26.

July 23: India budget

On July 24, the Flash PMIs for India, the euro zone, France, Germany, and the U.S. were released.

July 26: U.S. core inflation