NEW DELHI – The Indian government has allocated billions of dollars towards job creation and support for regions governed by key coalition partners in its latest budget. This move aims to strengthen the coalition and regain voter support following Prime Minister Narendra Modi’s recent election setback.
Key budget allocations include $32 billion for rural programs and $24 billion over five years for job creation, along with more than $5 billion for states led by coalition partners. “In this budget, we particularly focus on employment, skilling, small businesses, and the middle class,” Finance Minister Nirmala Sitharaman announced.
Tax adjustments feature prominently in the budget, with increased taxes on equity investments to temper market concerns and reduced taxes for foreign companies to attract more investment.
Despite increased spending, India has set a lower fiscal deficit target of 4.9% of GDP for the fiscal year ending March 31, 2025, down from 5.1% in the interim budget. This reduction is facilitated by a $25 billion surplus from the central bank. Gross market borrowing has also been slightly reduced to 14.01 trillion rupees.
Economic Growth and Reforms
India, the third-largest economy in Asia, grew by 8.2% in the previous fiscal year. The government projects growth between 6.5% and 7% for the current fiscal year. Economists attribute the Bharatiya Janata Party’s (BJP) recent electoral losses to rural distress and a weak job market, emphasizing the need for land and labor reforms to sustain economic growth.
The budget includes incentives for companies to train employees and offers cheaper loans for higher education to boost employment. The reported urban unemployment rate is 6.7%, but the Centre for Monitoring Indian Economy estimates it at 8.4%.
Spending on long-term infrastructure projects remains at 11.11 trillion rupees, with states receiving 1.5 trillion rupees in long-term loans tied to reform milestones in areas like land and labor.
Tax Changes
The government has raised the tax rate on equity investments held for less than a year from 15% to 20%, and from 10% to 12.5% for investments held longer than 12 months. These changes take effect immediately. The tax on equity derivative transactions will increase from October 1.
While the budget announcement initially led to declines in shares and the rupee, both recovered most of their losses by the end of the trading day. Vineet Arora, investment manager at NAV Capital Emerging Star Fund, stated that the tax changes might stabilize the market and attract long-term investors.
Corporate tax for foreign companies has been reduced from 40% to 35%, aiming to encourage more investment. Lower taxes for lower-income consumers are expected to boost spending, driving consumer stocks to record highs.
