ICICI Securities Research Head Expects Modest Capex Growth in Budget 2026
Pankaj Pandey, the head of research at ICICI Securities, anticipates a modest increase in capital expenditure in the upcoming Union Budget 2026. This expectation is primarily due to the high base of ₹11.2 lakh crore established in previous budgets. In an exclusive interview with Mint, Pandey shared his insights on Budget 2026, early Q3 earnings trends, and investment strategies amid rising geopolitical risks.
Key Expectations from Budget 2026
Pandey believes that Budget 2026 will largely continue the government's focus on manufacturing, capital expenditure, and fiscal prudence. He expects some additional measures to boost exports, especially given the current global trade uncertainty and tariff logjam. However, the scope for significant new measures to accelerate consumption appears limited due to fiscal constraints.
Areas likely to receive increased allocations include:
- Defence: Considering the government's focus on modernizing the armed forces, the budget for FY27 might see a 15-20% increase in capital outlay over FY26's ₹1.8 lakh crore. The Defence Ministry aims to achieve a defence capital budget-to-GDP ratio of 0.8% over the next five years, up from the current 0.5%.
- Railways: New high-speed corridors, Vande Bharat trains, and Kavaach programmes could receive substantial funding.
- Real Estate: This sector, contributing 7-8% to GDP and being the second-largest employer after agriculture, is expected to receive support. Affordable housing, which has been under stress, may get relief measures such as expanded definitions in terms of value and unit sizes.
- Textiles: As the second-largest job-creating industry employing nearly 45 million people, the textile sector is reeling under high US tariffs. Policy measures, including relief schemes, tax concessions for new units, and permanent removal of the 11% cotton import duty, are anticipated.
- Mining: Increased budgetary allocation for the mining and processing of rare earth minerals is expected in the metals domain.
Limited Scope for Consumption Boost
Pandey notes that the government has already engaged in front-loading measures over the past year, including reducing personal income tax rates and rationalizing GST rates to boost consumption. With limited fiscal room, he does not expect any new significant measures to accelerate consumption further. However, minor tweaks to personal income taxation cannot be ruled out, as the government aims to shift individuals from the old to the new tax regime.
Assessment of Q3 Earnings and Investment Outlook
In the IT sector, Pandey observes early signs of stabilization despite headwinds from US macro uncertainty, tariff risks, and geopolitical tensions. Q3 results have shown green shoots, with select pockets of growth across verticals and geographies. Valuations have become more supportive after prolonged corrections, making risk-reward favourable for long-term investors.
In the banking space, credit growth has improved to 10-12%, driven by retail and MSME segments. Asset quality remains resilient, though some lenders faced volatile earnings due to seasonal agri-related stress and regulatory provisions. Pandey remains positive on both IT and banking sectors due to supportive valuations and growth visibility.
Navigating Geopolitical Risks
With geopolitical risks increasing, Pandey advises investors to stay invested in companies with healthy capital efficiency (RoE and RoCE above 15%), strong balance sheets (debt-to-equity below 1), and growth longevity. He suggests avoiding high-export-oriented businesses in the near term and focusing on domestic-economy stocks. The Indian economy, with lower inflation, lower bond yields, and improving growth, supports a positive equity outlook.
Sectors to Watch for Medium Term
Pandey highlights BFSI, capital goods, IT, and real estate as sectors likely to generate alpha this year:
- BFSI: Revival of credit growth, strong asset quality, and valuations at historical mean make PSU banking space attractive.
- IT: Valuations have hit a floor, and growth is expected to bounce back in CY26E.
- Capital Goods: Momentum in new projects and tenders points to strong ordering activity in CY26E.
- Real Estate: The sector has a huge growth runway, potentially multiplying by three times over the next five years.
Pandey emphasizes that investors should not sell in turbulent times unless long-term prospects of individual businesses materially deteriorate. He recommends consulting certified experts before making investment decisions, as market conditions can change rapidly.
