The coalition government led by Indian Prime Minister Narendra Modi has presented its inaugural full-year budget following the loss of an outright majority in parliament last year.
Finance Minister Nirmala Sitharaman has unveiled a series of measures to address the challenges of slowing growth, escalating prices, and declining consumption within the middle class of Asia’s third-largest economy.
Following a remarkable growth trajectory exceeding 8%, India is poised to experience its slowest economic expansion in four years. This downturn is attributed to stagnant wages and elevated food prices, which have adversely affected consumer spending and corporate profits.
Five essential insights emerge from India’s union budget:
The government has announced increased income tax exemption limits, significantly relieving millions of taxpayers. Under the new regulations, earnings of up to 1.2 million rupees ($13,841; £11,165), excluding special rate income such as capital gains, will be completely tax-free.
The finance minister has announced adjustments to various income tax slabs, which are expected to increase the middle class’s disposable income.
According to Aurodeep Nandi, an economist at Nomura, the income tax concessions for the middle class are intended to mitigate the decline in urban consumption.
The potential impact, however, may be constrained, as only a small percentage of Indians contribute to direct taxes. In the year 2023, a mere 1.6% of the Indian population, translating to approximately 22.4 million individuals, fulfilled their income tax obligations, as revealed in recent parliamentary data.
Following the announcements, the market responded positively, with stocks in the automobile, consumer goods, and online grocery sectors experiencing significant gains.
Since 2020, capital expenditure funded by the state on significant road, port, and railway projects has played a crucial role in propelling India’s growth engine.
In a surprising turn of events, the government has raised its infrastructure expenditure target for the year from 11.1 trillion to 11.2 trillion rupees ($129.18bn; £104.21bn) despite a notable contraction in actual spending during the first nine months.
The government has proposed a plan to provide interest-free loans to states to increase their capacity to invest in infrastructure development.
The budget outlines an ambitious target of producing 100GW of nuclear energy by 2047. Under this plan, a nuclear energy mission has been initiated, backed by a budget of 200 billion rupees, equivalent to $2.3 billion or £1.86 billion. The strategy involves the deployment of five indigenous reactors by 2033, alongside proposed amendments to existing legislation, such as the Civil Liability for Nuclear Damage Act, aimed at achieving these objectives and enhancing private sector involvement in the industry.
In a significant policy shift, the limits on foreign direct investment in the insurance sector have been raised from 74% to 100%.
“This will encourage foreign insurers to invest in the expanding Indian insurance market, where strong premium growth is anticipated to enhance profitability,” stated Mohammed Ali Londe, Senior Analyst at Moody’s Ratings.
A high-level committee has been established to implement regulatory reforms in non-financial sectors, aiming to alleviate the compliance burden on corporations. This initiative responds to growing concerns among investors regarding the business climate. The panel’s recommendations are expected to be delivered within the next year.
Small and micro industries, representing 35% of India’s manufacturing sector and generating millions of jobs, are set to receive a significant boost with fiscal support amounting to 1.5 trillion rupees ($17.31 billion; £13.96 billion) over the next five years.
The government has increased production-linked subsidies and reduced import duties for domestic manufacturing units in various sectors, including textiles, mobile phones, and electronics. The potential for increased private investments is on the horizon, particularly as the industry has struggled to regain momentum following the Covid-19 pandemic.
Despite increasing budget allocations for infrastructure development, India navigates a complex balancing act, striving to stimulate economic growth while maintaining fiscal discipline.
The budget emphasises a pledge to lower the government’s deficit, aiming to decrease it from 4.8% this year to 4.4% by 2026. This highlights the ongoing efforts to balance earnings and expenditures.
Global rating agencies are monitoring these figures attentively, as a decrease in debt levels could result in improved investment ratings and lower borrowing costs for the nation.
The recent economic slowdown in India has intensified the dilemma between fostering growth and maintaining fiscal prudence.
The finance ministry’s latest economic survey projects a slowdown in GDP growth, estimating it will fall between 6.3% and 6.8% for the financial year concluding in March 2026. This outlook aligns with the forecasts provided by the Reserve Bank of India.
As the budget takes a backseat, attention is now directed towards the upcoming monetary policy meeting of the central bank, which is scheduled for later this month.
The Reserve Bank of India has kept its policy rates steady at 6.5% since February 2023. However, given the recent declines in growth and inflation rates, indications suggest that it may soon start lowering borrowing costs.
Last week, the central bank announced its intention to infuse $18 billion into the domestic banking system, a strategy aimed at alleviating a cash shortage. Many analysts have interpreted this decision as a potential precursor to forthcoming rate cuts.
