1. Capital Expenditure & Fiscal Spending
India's capital expenditure witnessed a strong rebound in November and December 2024, leading to a 1.7% year-on-year (y-o-y) growth during April-December 2024. This recovery reflects the government's continued focus on infrastructure development and long-term economic expansion. Among the top-spending ministries, Road Transport & Highways, Railways, Finance, and Housing & Urban Affairs saw a rise in capital expenditure, reinforcing efforts to enhance public infrastructure and urban development. However, Defence and Communications experienced a contraction in capital spending, indicating a shift in fiscal priorities.
Despite this recovery in capital spending, total government expenditure grew by 5.8% y-o-y, a moderation compared to 8.4% during the same period in the previous year. This decline signals a more cautious fiscal approach, likely influenced by efforts to maintain fiscal discipline while balancing growth initiatives.
2. GST Collections & Growth Drivers
Gross GST collections (Centre + States) grew by 12.3% y-o-y in January 2025, reaching ₹1.96 lakh crore. This growth was primarily driven by a strong increase in domestic transactions (+10.0% y-o-y) and a surge in import-related GST collections (+19.8% y-o-y). The rise in import GST suggests increased global trade activity, while steady domestic GST collections indicate resilient consumption trends despite market uncertainties.
3. Net GST Collections & Cumulative Performance
After adjusting for tax refunds, which increased by 23.9% y-o-y, net GST collections rose by 10.9% y-o-y to ₹1.72 lakh crore. This significant increase in refunds suggests improved efficiency in tax administration. Over the April 2024 - January 2025 period, cumulative gross GST collections grew by 9.4% y-o-y, underscoring stable revenue generation and economic resilience, even amidst external headwinds such as global financial volatility and foreign capital outflows.
Indian Equity Markets
1. Valuations & Market Trends
While large-cap valuations appear reasonable, with Nifty 50’s forward P/E ratio below its long-term average, the mid-cap and small-cap segments remain overheated, continuing to trade at higher-than-historical valuation multiples. This persistent overvaluation raises concerns about the sustainability of growth in these segments.
A closer look at stock re-rating trends shows that nearly 40% of mid-cap stocks and 35% of small-cap stocks are currently trading at P/E multiples above 50, highlighting a significant expansion in valuations over the last five years. This premium pricing in broader markets suggests a potential risk of correction if earnings growth fails to keep pace with valuations.
2. Sectoral Market & Earnings Performance
Earnings performance in 3QFY25 was driven by BFSI, Technology, Real Estate, Healthcare, and Capital Goods, which contributed positively to corporate profitability. However, Oil & Gas, Metals, Cement, Automobiles, and Consumer sectors witnessed earnings declines, impacting overall market sentiment. Notably:
Oil & Gas (-10% YoY) and Metals (-9% YoY) were affected by global commodity price fluctuations.
Cement (-47% YoY) saw a sharp decline due to rising input costs and lower-than-expected demand.
Automobiles (-9% YoY) faced pressure from weaker rural demand and rising vehicle prices.
Consumer sector earnings (-1% YoY) remained relatively stable but showed signs of slowing demand.
Since September 2024, the technology sector has outperformed other industries, benefiting from global digitization trends and strong earnings growth. Meanwhile, Auto, FMCG, Metal, and Realty sectors, which had previously shown strength, faced corrections, reflecting shifts in investor sentiment. In January 2025, most sectoral indices declined, with the Auto sector being the only exception, recording gains despite broader market weakness.
3. FII & DII Investment Trends
Foreign Institutional Investors (FIIs) have remained net sellers, with $8 billion in outflows in January 2025, marking a record-high exodus between October 2024 and January 2025. This persistent FII selling has been driven by:
Global risk aversion, with investors reallocating capital to developed markets.
Concerns over stretched valuations in mid-cap and small-cap segments.
US Federal Reserve policy shifts affecting emerging market capital flows.
However, Domestic Institutional Investors (DIIs) have stepped in to counterbalance these outflows, investing a record $62.9 billion in equities in CY24, nearly triple the $22.3 billion invested in CY23. This surge in domestic investments has kept markets relatively stable despite heavy FII selling, reducing the FII-DII ownership gap to a record low as of December 2024.
Despite near-term volatility, India’s long-term economic outlook remains positive, supported by strong domestic demand, policy stability, and fiscal prudence.
Indian Debt Market
1. Inflation & Fiscal Deficit Trends
CPI inflation declined to a five-month low of 4.3% in January 2025, down from 5.2% in December 2024, indicating easing price pressures. This suggests that supply chain normalization, stable commodity prices, and government interventions have contributed to lower inflationary pressures.
On the fiscal front, the government has revised its fiscal deficit estimate for FY25 (RE) down from 4.9% to 4.8% of GDP, highlighting a commitment to fiscal consolidation. Additionally, the Central Government’s Debt-to-GDP ratio is projected to decline from 57.1% in FY25RE to 56.1% in FY26BE, with further reductions targeted beyond FY26. These improvements reflect the government’s focus on balancing fiscal discipline with economic growth.
2. Government Borrowing Plans for FY26BE
For FY26BE, the government has set gross borrowing at ₹14.82 lakh crore (4.2% of GDP), slightly higher than ₹14.01 lakh crore in FY25RE due to COVID-related loan repayments. However, net borrowings are projected at ₹11.54 lakh crore (3.2% of GDP), slightly lower than ₹11.63 lakh crore in FY25RE, indicating a measured approach to debt financing.
3. Fiscal Deficit Funding Strategy
To finance the fiscal deficit, the government plans to raise 74% of the required funds through net dated market borrowings, ensuring stable debt management. This approach aims to:
Reduce reliance on external borrowing to maintain financial sovereignty.
Keep market interest rates stable to support investment activity.
Enhance investor confidence by demonstrating fiscal responsibility.
With monetary policy and fiscal discipline aligning, the debt market is expected to remain stable, ensuring sustained investor confidence and long-term economic resilience.
Conclusion: Key Takeaways
Macroeconomic Stability: Capital expenditure growth and GST collections remain strong, supporting economic momentum.
Equity Market Risks: Large caps offer better valuations, while mid-cap and small-cap segments remain overheated.
Investment Trends: FII outflows continue, but strong DII participation is keeping markets stable.
Debt Market Strength: Fiscal deficit consolidation and borrowing discipline signal stability and long-term growth potential.
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