Markets may appear volatile, but the current phase should be viewed as consolidation rather than a sign of deeper stress, according to Prashant Khemka, founder and MD of WhiteOak Capital Management. In an exclusive conversation with Moneycontrol, he outlined his expectations for the upcoming Union Budget and long-term market outlook.

Budget Focus on Structural Reforms

Khemka believes markets are less concerned about near-term earnings support and more focused on long-term intent from the Union Budget. He argues that incremental tax tweaks or sector-specific incentives may deliver only fleeting rallies, while investors are watching for a clear structural roadmap.

"What investors are watching for instead is a clear structural roadmap," Khemka emphasized, highlighting the market's preference for sustainable policy direction over short-term stimulus measures.

Three Key Priority Areas

Defence Spending Enhancement

Khemka identified sharply higher defence spending as a critical priority, noting that current expenditure remains around 2.00% of GDP. He advocates for substantial increases in defence allocation to strengthen strategic infrastructure.

"We need to substantially ramp up our defence budget. It has been stuck at around 2.00% of GDP for quite some time. While India has spent heavily on physical infrastructure, defence is the most critical form of infrastructure," he stated.

Given India's geopolitical position and regional challenges, Khemka suggests the country should be at the higher end of the 4.00-5.00% range that many countries globally are targeting.

Semiconductor Self-Reliance

The second priority focuses on reducing dependence on a handful of countries for critical imports, particularly semiconductors. Khemka highlighted India's significant lag in this sector, describing the country as "30 years behind in semiconductors, if not more."

"While initiatives such as the PLI scheme have helped us make a start over the past two to three years, what is needed is a massive push," Khemka explained. He advocates for government-backed semiconductor efforts, acknowledging that private capital alone may not bridge the existing gap.

Business Environment Reforms

The third priority involves deeper reforms to ease of doing business, particularly addressing land acquisition challenges and regulatory complexity. Khemka views these structural changes as essential for long-term economic growth and competitiveness.

Market Outlook and Performance

After delivering exceptional returns following the Covid-19 lows, Indian equities have largely moved sideways for the past 15-18 months. Khemka describes this period as "disappointing but normal," cautioning against over-interpreting short-term market movements.

Earnings Growth Expectations

Khemka expects FY26 earnings growth to remain in high single digits, with FY27 likely tracking nominal GDP growth in the low double digits. While near-term visibility remains mixed, he believes markets will reward credible structural reform even without immediate earnings upside.

"Markets don't follow the calendar," he noted, emphasizing that past returns offer little insight into future performance. His outlook suggests that sustainable policy reforms will drive long-term market performance more effectively than short-term fiscal measures.

Source: https://www.moneycontrol.com/news/business/markets/budget-should-explain-governments-long-term-structural-road-map-prashant-khemka-whiteoak-capital-13787859.html

Pankaj Pandey, head of research at ICICI Securities, expects Budget 2026 to largely continue the government's focus on manufacturing, capital expenditure, and fiscal prudence. Despite anticipating modest overall capex growth given the high existing base, specific sectors like defence and railways are positioned for significant allocation increases.

Budget 2026 Capital Expenditure Outlook

The expert anticipates modest growth in capital expenditure, considering the substantial existing base and historical performance:

Despite the overall modest expectations, defence and railways are expected to receive prioritised allocations. Railways specifically may see increased funding for new high-speed corridors, Vande Bharat trains, and Kavaach programmes.

Defence Spending Projections

The defence sector is positioned for substantial budget increases, driven by the government's modernisation focus:

The Defence Ministry targets achieving a defence capital budget-to-GDP ratio of 0.80% over the next five years, representing a substantial increase from the current 0.50% of GDP.

Sectoral Focus Areas

Several sectors are expected to receive targeted support in Budget 2026:

Real Estate: Expected to receive support due to its 7-8% GDP contribution, correlation with allied industries like cement and steel, and status as the second-largest employer after agriculture. Affordable housing may see relief measures including expanded definitions for value and unit sizes.

Textiles: The industry, employing nearly 45 million people, faces pressure from high US tariffs on Indian exports. Expected policy measures include relief schemes, tax concessions for new units, and potential permanent removal of the 11% cotton import duty.

Mining: Increased budgetary allocation expected for rare earth minerals mining and processing.

Consumption and Tax Policy

Pandey sees limited scope for new consumption acceleration measures, noting the government has already engaged in front-loading through reduced personal income tax rates and rationalised GST rates. With constrained fiscal room, no major new consumption measures are expected, though minor tweaks to personal income taxation remain possible to shift individuals from old to new tax regimes.

Q3 Earnings Assessment

Early Q3 results indicate stabilisation trends across key sectors:

IT Sector: Shows early signs of stabilisation despite continued headwinds from US macro uncertainty and geopolitical tensions. Select growth pockets emerged across verticals and geographies, with improved deal activity and larger-deal TCV wins indicating better demand visibility.

Banking Sector: Credit growth has improved to 10-12%, driven by retail and MSME segment traction with strong competitive intensity in home and auto loans. Asset quality remains resilient across segments, with stress in MFI and unsecured retail largely bottoming out.

Investment Strategy Recommendations

Amid increased geopolitical risks and market volatility, with headline indices down 4% since early 2026, Pandey recommends focusing on companies with healthy capital efficiency (RoE and RoCE above 15%), strong balance sheets (debt-to-equity below 1), and growth longevity. For medium-term investment, BFSI, capital goods, IT, and real estate sectors are positioned at the top of the recommendation list, with sector rotation expected as the core theme.