How will India spend its billions?

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

The government’s job of balancing the books has also been made much easier by the Reserve Bank of India after it effectively wrote a $25 billion check to the Indian government earlier this year. The central bank had a surplus since it holds over $200 billion worth of U.S. Treasurys and other securities.

Where will the government spend?

Analysts on Wall Street are keenly tracking how the political winds are blowing in New Delhi.

Many see a cut in income taxes as overdue since collections have risen from 2% of GDP before the Covid-19 pandemic, to 3% in 2023. It’s expected to rise to 3.5% in 2025 if left unchecked, according to Goldman Sachs’s estimates.

The biggest beneficiaries of such cuts are likely to be — aside from individuals — companies in the consumer staples sector.

“A tactical opportunity in the consumption space could arise if the government announces any consumption stimulus or increases the tax exemption limits, which can trigger consumption demand,” said UBS’ Kamdar.

Funds such as Columbia India Consumer ETF, which hold stocks targeting consumer spending, are up more than 22% this year on the theme, while the Nifty 50 benchmark index has risen 14% over the same period.

Large-cap stocks that had seemingly fallen asleep have suddenly rallied over the past few months. Hindustan Unilever, the listed subsidiary of U.K.-based multinational Unilever, is one such example that has been touted as a way to trade the Indian budget. The company owns a number of brands in India, such as cleaning agents Cif and Domex, Magnum and Cornetto ice creams, Horlicks drinks, personal care makers Dove, TRESemme, and Vaseline, among others.

“Staples performance could see a further uptick based on the magnitude and mode of Government stimuli for rural India in the budget,” said Macquarie equity strategists led by Adity Suresh in a note to clients last week.

“We believe at current levels, HUVR [Hindustan Unilever] offers a better opportunity to play the potential uptick in rural demand from budget outlays.”

Bank of America’s India economist Aastha Gudwani believes the government will further subsidize health care coverage and manufacturing in the country to shore up jobs.

“To boost consumption, we expect [an] effective tax rate cut, higher subsidy for cooking gas and interest rate subvention for rural and urban housing,” said Gudwani.

“While this may sound like a lot of spending, we don’t see this disturbing overall fiscal math courtesy the bonanza dividend received by the central government from the RBI and other [Central Public Sector Enterprises].”

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IMF forecasts a bumpy GDP ride for India. The International Monetary Fund upgraded its economic forecast for India for 2024 while warning that growth will dip in the following year. India — which the IMF had previously called “the world’s fastest-growing major economy” — is expected to grow 7% in 2024, higher than April’s projection of 6.8%. However, it expects growth to decline and reach 6.5% in 2025.

Singapore to invest billions in India. Sovereign wealth fund Temasek plans to invest up to $10 billion in India over three years in financial services and health care sectors as it pivots away from China. India already accounts for 7% of its assets. It said that profits from investments in the United States and India were helping it cushion the impact of underperformance in China.

India-born CEO reveals how he quit his job to start $30 billion Zscaler. Jay Chaudhry grew up in rural India and moved to the U.S. to study engineering. At the age of about 39, he and his wife quit their day jobs and plunged their life savings into a cybersecurity software startup. After selling out for $70 million, Chaudhry had another go and started Zscaler in 2007. It’s now valued at about $30 billion.

Indian stocks have hit record highs again. The Nifty 50 index closed above 24,800 points for the first time, heading for a 1.2% gain this week. Information technology stocks — such as LTIMindtree and Infosys —appear to be behind the rally after beating earnings expectations.

The benchmark 10-year Indian government bond yield has ticked marginally lower to 6.96% over the past week. The Indian government is expected to raise $3.7 billion by selling rupee bonds on Friday, which could move fixed-income markets.

On CNBC TV this week, Goldman Sachs Asset Management’s Hiren Dasani said that India could benefit from the trade spat between the U.S. and China in the semiconductor sector. The U.S. is reportedly looking at further sanctions to prevent advanced chip-making capabilities from being shared with China. “[The trade barriers] can also help countries like India, which is trying to get into the semiconductor value chain,” Dasani told CNBC’s “Squawk Box Asia.”

Meanwhile, Polka Mishra of Javelin Wealth Management explained why she is bullish on India for the long term. She expects about $500 billion worth of infrastructure projects to be completed over the next two years — equivalent to the total investment over the past decade — as one reason to be favorable toward India. “It’s not just the scale but also the pace of development that’s exciting,” Mishra said.