Budget: Tax relief for Indian middle class - but will it boost economy? - Voice of Asia

Indian Prime Minister Narendra Modi's coalition government has unveiled its first full-year budget after his party lost its absolute majority in parliament last year. Finance Minister Nirmala Sitharaman announced a series of measures aimed at addressing the slowdown in Asia's third-largest economy, rising prices, and weak middle-class consumption.

After a period of global-leading growth exceeding 8%, India's economic growth is projected to slow to a four-year low as wage stagnation and high food prices hit consumer spending and corporate profits. The budget's highlights include tax cuts for the middle class, maintaining state-led infrastructure spending, promoting nuclear energy and the insurance industry, and focusing on small industries and regulatory reforms.

To ease the burden on millions of taxpayers, the government raised the income tax exemption limit, making annual income up to 1.2 million rupees (approximately $13,841), excluding specially taxed income such as capital gains, fully tax-free. The finance minister also announced adjustments to other income tax brackets, potentially leaving more money in the hands of the middle class. Nomura's India economist Aurodeep Nandi stated that the income tax benefits for the middle class "appear aimed at addressing the sluggishness in urban consumption." However, its impact may be limited, as only a small fraction of Indians pay direct taxes. According to parliamentary data, only 1.6% of Indians (22.4 million) actually paid income tax in 2023.

Since 2020, state-funded capital expenditures on major road, port, and rail projects have been a key driver of India's economic growth. Despite an unexpected contraction in actual spending in the first nine months of this year, the government has slightly increased its infrastructure spending target for this year from 11.1 trillion rupees to 11.2 trillion rupees (approximately $129.18 billion). The government also proposed providing interest-free loans to states to enable them to increase infrastructure construction spending. Additionally, the budget set a target of achieving 100 gigawatts of nuclear power generation by 2047 and launched a nuclear energy mission with a budget of 200 billion rupees (approximately $2.3 billion). Meanwhile, the foreign direct investment limit in the insurance sector has been increased from 74% to 100%. Moody's senior analyst Mohammed Ali Londe stated, "This will help foreign insurance companies invest in the growing Indian insurance market, and we expect strong premium growth to improve profitability."

To improve the business environment, the government announced the establishment of a high-level committee responsible for regulatory reforms in the non-financial sector and reducing the compliance burden on businesses. The group will make recommendations within a year. Small and micro-enterprises were also boosted with 1.5 trillion rupees (approximately $17.31 billion) in financial support over the next five years. The government also increased production-linked subsidies and reduced import duties for locally manufactured units in industries such as textiles, mobile phones, and electronics. Despite the slight increase in infrastructure spending, India still needs to maintain a delicate balance between promoting economic growth and controlling expenditure. The budget reaffirmed its commitment to reduce the government deficit (the gap between revenue and expenditure) from 4.8% this year to 4.4% by 2026. India's recent economic slowdown has made the trade-off between growth and fiscal prudence increasingly challenging. With the budget now released, the focus will shift to the central bank's monetary policy meeting later this month. The Reserve Bank of India has held its policy rate at 6.5% since February 2023, but may begin to ease borrowing costs as growth and inflation begin to decline. Last week, the central bank announced plans to inject $18 billion into the domestic banking system to alleviate cash shortages, a move seen by many as a precursor to interest rate cuts.