India’s Finance Minister Nirmala Sitharaman presented the first full-year budget of Prime Minister Narendra Modi’s coalition government following the loss of an outright majority in parliament last year. The budget aims to address slowing growth, rising prices, and reduced consumption, particularly among the middle class, as Asia’s third-largest economy faces its weakest expansion in four years.
India’s economy, which had enjoyed growth rates above 8% in previous years, is now set for its slowest growth in four years, with stagnant wages and high food prices dampening consumer spending and corporate profits. The government’s budget includes several key measures to address these challenges.
Tax Cuts for the Middle Class
A significant move in the budget is the tax relief for the middle class. The government raised the income tax exemption limit, making earnings up to 1.2 million rupees ($13,841; £11,165) tax-free, excluding special rate income like capital gains. The budget also includes adjustments to income tax slabs, which are expected to leave more disposable income in the hands of the middle class. However, analysts note that this will likely have a limited impact, as only 1.6% of Indians (about 22.4 million people) actually pay income taxes.
Infrastructure Spending on Track
State-funded capital expenditure for major infrastructure projects such as roads, ports, and railways has been a critical driver of India’s economic growth since 2020. Despite a contraction in infrastructure spending during the year, the government has slightly increased its spending target from 11.1 trillion to 11.2 trillion rupees ($129.18bn; £104.21bn). Additionally, the government is offering interest-free loans to states to boost infrastructure development.
Nuclear Energy and Insurance Sector Growth
The budget sets an ambitious goal of generating 100GW of nuclear energy by 2047, with a 200 billion rupee ($2.3bn; £1.86bn) allocation for the Nuclear Energy Mission. The plan aims to deploy five indigenous reactors by 2033 and amend laws to encourage private sector participation. The budget also includes a significant policy shift in the insurance sector, increasing foreign direct investment limits from 74% to 100%, a move expected to attract foreign insurers and promote growth in India’s insurance market.
Support for Small-Scale Industries and Regulatory Reforms
Small and micro industries, which contribute to 35% of India’s manufacturing, have received a boost with a fiscal support package of 1.5 trillion rupees ($17.31bn; £13.96bn) over the next five years. The government has also introduced production-linked subsidies and reduced import duties to foster local manufacturing, particularly in textiles, mobile phones, and electronics.
Fiscal Prudence Amid Economic Slowdown
Balancing growth and fiscal responsibility remains a challenge. The budget reiterated the government’s commitment to reducing the fiscal deficit to 4.4% of GDP by 2026, down from 4.8% this year. Lower deficit figures are crucial for maintaining favorable credit ratings and reducing borrowing costs.
The economic slowdown has made this balancing act increasingly difficult, with the Reserve Bank of India forecasting GDP growth of between 6.3% and 6.8% for the year ending March 2026. As attention shifts to the central bank’s monetary policy meeting later this month, the RBI is expected to ease borrowing costs in response to slower growth and decreasing inflation.
