Budget Boost to the Great Indian Consumption Story!

What’s the Point?

One of the key highlights of Budget 2025-26 was the reduction in tax liability for individual income taxpayers, with no liability for those earning up to Rs 12 Lakh (Rs 12.75 Lakh in case of salaried employees*). These tax changes amount to more than Rs 1 lakh crore worth of tax foregone, and could lead to a significant consumption boost in the economy. In fact, this complements the rising welfare spends coming from various states that are also positive for consumption. While structural factors favouring consumption remain strong (premiumisation, urbanisation, formalisation and digitisation), the near-term slowdown seen in consumption could see a reversal. Rural consumption was already showing signs of pick-up, and these tax breaks could lift up spirits of overall consumption. With the recent market correction bringing consumer sector valuations closer to long term averages, investors may consider adding exposure to the sector via the HDFC Non-Cyclical Consumer Fund.

*Due to Standard deduction available of Rs75,000

Read our detailed note on the Budget at this link

Budget in Perspective

Source: Incometaxindia.gov.in, Avendus Spark Research

Changes in the current budget are expected to lead to improvement in urban consumption, which was in slowdown. Rural consumption has been in revival, led by higher state government expenditure and good monsoons, combined with favourable terms of trade for farmers (high food inflation, low non-food inflation). Commentary from corporates corroborate the pickup witnessed in Rural Consumption.

Source: Nuvama Institutional Equities, Company Data

What factors favour the Non-Cyclical Consumer theme?

Key fundamental drivers in place

Inflection point in per capita income: India is on the cusp of entering a phase of accelerated consumption with per capita income crossing US$2,000 mark. Consumption in other countries like China accelerated post crossing US$2,000 mark in per capita income
Demographic Dividend and Higher Urbanization: India’s median age is at 28 and is expected to add 97m people to working age population in the next 10 years. Further, Urban population is expected to move up from current ~36% to ~40% in 2030
Premiumization across consumer categories due to significant increase in upper middle-class income and Rich income group households
Higher formalization of economy is leading to market share gains for organized players
Digitization: Changing consumption landscape- improving access to products and services

Near term factors that could benefit include

Tax relief starting FY26 for individual income tax payers, along with increase in welfare spends led by state governments
Improving macroeconomic factors: lower inflation, pickup in consumption momentum
Above normal monsoons in 2024

Stable earnings and ROE profile of Non-Cyclical Consumer companies

Sector represents companies with one of the highest ROEs/ROCEs, a relatively stable earnings growth profile and strong balance sheet

In the current context of heightened global risks, the non-cyclical consumer theme presents itself as a relatively insulated sector, available at near historical average valuations

How to invest in this theme?

With a mix of new-age consumption (quick commerce, quick service restaurants), discretionary themes such as consumer services, consumer durables, and traditional staples companies such as FMCG, and healthcare / telecom companies, this theme offers a variety of segments for an active fund manager to create a portfolio from. The HDFC Non-Cyclical Consumer Fund invests across market cap segments, seeking to invest in companies which are leaders and/or are gaining market shares due to superior execution, scale, better adoption of technology etc., while focussing equally on Companies which are likely to witness steady and secular growth and Companies which are likely to see a turnaround in profitability and have potential of being re-rated.

Investors might consider taking exposure to this theme via our fund, HDFC Non-Cyclical Consumer Fund, via a mix of lump sum and SIP transactions. Refer our detailed presentation to know more!

Sources: Bloomberg, Income Tax India, RBI, and other publicly available information

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