India’s government recently announced in a budget the allocation of billions of dollars for job creation in regions controlled by key coalition partners, with the aim of solidifying the coalition and regaining support after Prime Minister Narendra Modi’s recent electoral setback. The budget also included tax changes, such as a higher levy on equity investments and lower taxes for foreign companies, to address market concerns and attract more investment. Finance Minister Nirmala Sitharaman emphasized a focus on employment, skilling, small businesses, and the middle class, along with reforms in factors of production like land and labor.
While presenting the budget, Sitharaman outlined plans for subsequent budgets to continue focusing on key areas like employment and small business support. Despite the increased spending, India managed to reduce its fiscal deficit target to 4.9% of GDP by March 2025. Economists have emphasized the importance of land and labor reforms for sustaining India’s economic growth. The country’s economy grew by 8.2% in the past fiscal year and is expected to grow by 6.5% to 7% this fiscal year, with analysts commending the budget for striking a balance between supporting growth and maintaining fiscal discipline.
Among various measures aimed at boosting employment, the budget included incentives for job training, cheaper loans for higher education, and continued spending on long-term infrastructure projects. The government plans to assign 1.5 trillion rupees in long-term loans to states for funding infrastructure projects, linked to reform milestones in areas like land and labor. Additionally, in a concession to coalition partners, the government promised faster loans from multilateral agencies to certain states. However, implementing more ambitious reforms may prove challenging for the coalition government.
In terms of tax changes, India raised the tax rate for equity investments held for less than a year to 20% and increased the rate for longer-term investments to 12.5%. The government also raised taxes on equity derivative transactions and reduced corporate tax for foreign companies from 40% to 35% to encourage more investment. These changes were initially met with a negative market reaction, but analysts believe they could lead to market stabilization and attract long-term investors. Consumer stocks reached record highs following the announcement of a lower tax burden for lower-income consumers, expected to boost spending and drive economic growth.
