Find out why Nirmala Sitharaman’s budget fell short of stock investors’ expectations
The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, introduced substantial tax cuts aimed at boosting consumer spending and stimulating economic growth. However, despite these relief measures, the stock market did not exhibit a strong rally. Investors were expecting bold reforms and aggressive capital expenditure that would fuel long-term growth, but the budget focused primarily on tax relief and fiscal discipline rather than large-scale economic stimulus. This article delves into why the stock market’s response was underwhelming, analyzing key factors such as capital expenditure concerns, global trade issues, and investor sentiment.
Tax Cuts in the Union Budget 2025
One of the key announcements in the budget was a major reduction in personal income tax to support middle-class households and increase disposable income. The tax exemption threshold was raised, and tax rates for higher-income brackets were adjusted. This move was expected to put more money in the hands of consumers, boosting household spending and savings.
Corporate taxes for small and medium enterprises (SMEs) were also slightly reduced to encourage business expansion and job creation. However, large corporations did not receive significant tax relief, leading to a lack of enthusiasm from institutional investors who were expecting more direct incentives.
Market Expectations vs. Budget Provisions
Ahead of the budget, there were high expectations from investors, analysts, and corporate leaders that the government would introduce large-scale economic reforms and increase capital expenditure (capex) significantly. However, the budget’s main focus on short-term relief through tax cuts, rather than long-term investments in infrastructure and industry, disappointed many market participants.
While tax cuts help increase consumer spending, markets often react more favorably to policies that directly drive corporate growth, infrastructure development, and industrial expansion. Investors had been hoping for an aggressive push in infrastructure spending, but the budget presented only a modest increase in capex, leading to cautious market sentiment.
Concerns Over Capital Expenditure
One of the biggest disappointments for the market was the relatively small increase in capital expenditure. The government announced a capex outlay of ₹11.2 trillion ($130 billion) for the fiscal year 2025-26, marking a moderate increase from the previous year.
However, analysts and investors had been expecting a bolder investment plan that would significantly accelerate infrastructure projects, job creation, and economic expansion. The lack of aggressive capex spending contributed to the stock market’s lukewarm response.
Infrastructure-related stocks, such as construction firms, cement manufacturers, and engineering companies, reacted negatively to the budget. Investors believed that without a strong government-backed investment push, economic growth could remain sluggish in certain sectors.
Sectoral Impact and Corporate Reactions
The budget’s emphasis on boosting consumption through tax relief had mixed effects across different sectors.
Sectors That Benefited:
Consumer Goods & Retail:
Companies in FMCG (Fast-Moving Consumer Goods), such as Hindustan Unilever, Nestle, and Dabur, saw stock gains due to expectations of higher consumer spending.
Increased disposable income among middle-class families is expected to boost demand for essential goods.
Automobile Industry:
Bajaj Auto, Hero MotoCorp, and Maruti Suzuki experienced positive stock movements.
Lower taxes mean higher disposable income, which could lead to higher sales of two-wheelers and entry-level cars.
Sectors That Declined:
Infrastructure & Capital Goods:
Larsen & Toubro (L&T) and other infrastructure companies saw their stock prices drop due to the underwhelming capex allocation.
Investors had expected stronger infrastructure investments to drive sectoral growth.
Banking & Financial Services:
The budget’s cautious approach to fiscal expansion led to muted optimism in the banking sector.
While increased consumer spending may drive demand for loans, the absence of major financial reforms left banks with little immediate upside.
Global Economic Context & Trade Concerns
The timing of the Union Budget coincided with rising global trade tensions, particularly the new tariffs imposed by the United States. President Donald Trump announced 25% tariffs on imports from Mexico and Canada and 10% tariffs on Chinese goods, effective February 4. This move sparked fears of a global trade war, negatively impacting investor sentiment.
Impact on Indian Markets:
- The Nifty 50 index fell by 0.93%, closing at 23,265 points.
- The BSE Sensex declined 0.81%, finishing at 76,874 points.
Global markets, including Asian stock indices, also showed weakness, as investors braced for economic uncertainty.
The trade tensions overshadowed domestic fiscal measures, leading to increased volatility in the stock market. Investors preferred to adopt a wait-and-watch approach, rather than aggressively buying into the market after the budget announcement.
Concerns Over Fiscal Prudence & Deficit Management
While tax cuts are beneficial for short-term economic growth, they also raise long-term concerns about fiscal stability.
Key Fiscal Challenges:
Government Revenue Decline:
With lower tax collection, the government might struggle to fund large-scale projects in the future.
Limited Room for Growth Spending:
The government has committed to reducing the fiscal deficit to 4.4% of GDP by 2026.
This restricts the scope for aggressive spending, making investors question whether economic momentum can be sustained.
Investors remain cautious, as they recognize that fiscal discipline is necessary, but too much focus on deficit control could slow down growth-driven investments.
Why Didn’t the Stock Market Rally?
Several factors explain why the stock market failed to rally despite tax cuts:
Lack of Aggressive Capex Spending:
Investors were expecting higher infrastructure spending, which didn’t materialize at the expected scale.
Global Market Uncertainty:
U.S. trade tariffs increased global economic risks, affecting stock market sentiment.
Tax Cuts Favoring Consumers, Not Businesses:
While personal tax cuts help boost spending, businesses expected corporate tax relief or incentives, which were absent.
Cautious Investor Sentiment:
Many investors took a wait-and-see approach, uncertain about long-term policy direction.
Focus on Fiscal Deficit Reduction:
The government’s commitment to keeping the deficit under control raised concerns about future spending limitations.
Final Thoughts: What’s Next for the Market?
The Union Budget 2025 aimed to stimulate the economy through tax relief, but its impact on the stock market was underwhelming. Investors were expecting stronger reforms and higher capex, which led to disappointment.
While consumer-driven sectors may benefit from increased spending, the lack of aggressive investment in infrastructure and business incentives kept market enthusiasm low.
Going forward, investors will closely watch:
- Government follow-up measures to boost economic growth.
- Global trade policies and their impact on exports.
- Monetary policy decisions, especially interest rate changes.
For now, the market remains in a cautious phase, waiting for further economic clarity before committing to a strong rally.
