Stock market, Economic Survey: Warning, hopes for retail investors ahead Budget 2025

The Economic Survey 2024-25 touched upon key aspects of the economy and suggested how the recent rise in the dollar has led to re-evaluating of the outlook on inflation, policy rates and fiscal prudence. It talked about the need for infrastructure boost, earnings uncertainties, and elevated levels that stock markets globally are trading at. It warned that any downturn could impact capital flows, trigger volatility, and influence investor sentiment worldwide.

Boost to capex
The Economic Survey noted there is a general agreement that current infrastructure spending needs to be increased to achieve the desired objectives. It noted that the government has laid a special focus on infrastructure in the last five years. The capital expenditure by the union government on major infrastructure sectors has been increased at a trend rate of 38.8 per cent from FY20 to FY24, it noted. 

“Despite such earnest efforts by the union government and quite a few state governments and public sector undertakings supplementing these efforts with increased capex, there is still a significant unmet demand for infrastructure development,” it said.

A higher capex outlay for FY26, thus, look likely.

GDP growth to recover
The Economic Survey pegged India’s FY26 GDP growth between 6.3 per cent and 6.8 per cent. This range is inside the 6.4 per cent GDP that the economy is likely to register in FY25, as per the first advance estimates. The survey talked about headwinds to growth including elevated geopolitical and trade uncertainties and possible commodity price shocks but hoped the economy is getting back on the fast lane.   

“Domestically, the translation of order books of private capital goods sector into sustained investment pick-up, improvements in consumer confidence, and corporate wage pick-up will be key to promoting growth. Rural demand backed by a rebound in agricultural production, an anticipated easing of food inflation and a stable macro-economic environment provide an upside to near-term growth,” it said.

Dollar rise, fiscal prudence
The Economic Survey talked about the recent strength in the dollar and rethinking among the US Federal Reserve members about the path of US policy rates, which have triggered weakening of emerging market currencies to weaken. Fiscal strains and low real rates relative to history have led to rapid erosion of value in some currencies compared to others, it noted adding that borrowing costs for sovereigns are also rising as financial markets re-evaluate the outlook for inflation, policy rates and fiscal prudence. 

“Given the current tactical economic weakness, it will not be too surprising if the FM considers a modest countercyclical fiscal overstretch. FY25 fiscal deficit is likely to be lower at 4.8 per cent vs. the budgeted 4.9 per cent. This slack may also help to provide some headroom for the FY26 Union Budget,” MOFSL said.

Earnings uncertainty
The Economic Survey suggested several stock markets worldwide are at elevated levels and do not appear unduly concerned about economic growth and earnings uncertainties. Nor have financial stability risks fazed investors even though serious concerns are re-emerging about securitisation, leveraged loans, it noted. 

Market correction likely
Elevated valuations and optimistic market sentiments in the US raise the likelihood of a meaningful market correction in 2025. Should such a correction occur, it could have a cascading effect on India, especially given the increased participation of young, relatively new retail investors. 

The Economic survey noted that S&P 500 returns are a leading indicator for the Indian market, especially during shocks, while the reverse is not true. This emphasises that Indian markets tend to react more to trends originating in the US, reinforcing the need for caution in the event of a downturn in the latter’s stock market.

“Many of these investors that have entered the market post-pandemic have never witnessed a significant and prolonged market correction. Hence, if one were to occur, its impact on sentiment and spending may be non-trivial,” the Economic Survey noted.