(Bloomberg) -- India’s small and mid-cap stocks are likely to decline for the first time in three years in 2025 as the government scales back spending in favor of tax breaks to boost consumption, according to a Bank of America Corp. strategist.

This segment, dominated by infrastructure-related firms, beat the broader stock market handily in the past two years. The rally has already started to fizzle as Prime Minister Narendra Modi’s administration shifts its focus from investment-driven growth to reviving domestic demand.

“The government’s policies have seemingly moved toward balancing capex and consumption versus being primarily focused on capex earlier,” the bank’s India research head Amish Shah said in an interview Tuesday. “The capex cycle has reversed and a moderating growth would impact many sectors and stocks linked to this theme.”

The BSE Ltd.’s gauge of mid- and small-cap shares, in which a third of the constituents are industrial and capital goods stocks, has sunk 13% this year. That compares with a 2% retreat in the key BSE Sensex Index as investors turned to larger stocks amid rising volatility.

In August, Shah warned that slowing earnings growth, a weak global macro-environment as well as high valuations posed a threat to Indian stocks. The Sensex index has plunged almost 11% since reaching a record high on Sept. 26.

Consumption-linked companies are emerging among preferred themes in India’s $4.1 trillion stock market this year after the government announced $12 billion of tax breaks in the budget while capital spending — a key focus area for Prime Minister Narendra Modi’s economic strategy over the past decade — saw a minor increase.

Shares of these companies, that also include a few state-run enterprises, have traded at high valuations, due to their low-floats and demand from mutual funds, leading to “a lot of liquidity chasing the same stocks,” Shah said.