India’s Finance Minister, Nirmala Sitharaman, has recently unveiled the first budget of the coalition government following a narrow electoral victory that saw the Bharatiya Janata Party (BJP) lose its absolute majority in Parliament. This new budget, effective from April 1, replaces the interim budget and highlights a significant shift in the government’s priorities. Here, we delve into the six key takeaways from the budget, examining its impact on various sectors and stakeholders.
Key Takeaways from India’s New Budget
1. Impact on Investors: Increased Taxes
Higher Long-Term Capital Gains Tax
The new budget has raised the tax rate on long-term capital gains (LTCG) from 10% to 12.5%. Long-term capital gains refer to profits earned from assets held for over a year. This adjustment reflects the government’s intention to enhance tax revenues from investments and curb speculative trading.
Increased Short-Term Capital Gains Tax
Short-term capital gains, which apply to assets held for less than a year, will now be taxed at 20%, up from the previous 15%. This change aims to bring more equity to the tax structure and discourage short-term speculation, which has been a growing concern among policymakers.
Rising Securities Transaction Tax
The budget also introduces a higher securities transaction tax (STT) on derivatives trading. This move is part of a broader strategy to regulate the equity markets more tightly and address concerns raised in the Economic Survey about increased retail investor participation and speculative trading.
2. Addressing Employment Challenges: A $24 Billion Plan
New Employment Schemes
To tackle India’s persistent employment issues, the budget allocates 2 trillion rupees ($24 billion) over the next five years to fund three new employment schemes. These initiatives aim to create job opportunities and support new entrants into the formal job market.
First-Time Job Entrants Support
Under the new schemes, first-time job entrants in the formal sector will receive a direct cash transfer equivalent to their monthly salary (up to 15,000 rupees) in addition to their first month’s pay. This measure is designed to ease the financial burden of starting a new job and encourage more individuals to join the formal workforce.
Incentives for Manufacturing Jobs
Additionally, the government plans to boost manufacturing employment by providing incentives to both employees and employers. This initiative aims to enhance job creation in the manufacturing sector, which is crucial for India’s economic growth and development.
3. Tax Relief Measures: Start-Ups, Middle Classes, and Foreign Corporations
Abolition of Angel Tax
In a move welcomed by the start-up ecosystem, the budget abolishes the angel tax levied on capital raised by private companies. This tax, which had been a barrier to investment, is now removed to foster a more favorable environment for start-ups and innovation.
Personal Income Tax Adjustments
Minor adjustments to personal income taxes have been introduced, potentially saving individuals up to 17,500 rupees ($209) under the new tax regime. These changes are aimed at easing the tax burden on the middle class and stimulating consumer spending.
Reduction in Corporate Tax for Foreign Companies
To attract foreign investments, the corporate tax rate for foreign companies has been reduced from 40% to 35%. This reduction is intended to make India a more competitive destination for international businesses and encourage foreign direct investment (FDI).
4. Budget for Allies: Regional Spending and Development
Support for Key Regional Allies
The budget addresses the demands of the BJP’s regional allies, Janata Dal (United) from Bihar and Telugu Desam Party from Andhra Pradesh. Financial support of 150 billion rupees has been allocated for the development of Andhra Pradesh’s capital, with promises of further funding in future years.
Infrastructure Projects in Bihar
A series of new infrastructure projects, including airports, roads, and power initiatives, have been sanctioned for Bihar. These projects are expected to boost regional development and address the needs of the state’s growing population.
5. Fiscal Deficit Reduction: Improved Financial Management
New Fiscal Deficit Target
The budget sets a revised target for the fiscal deficit at 4.9% for the current financial year, down from the earlier forecast of 5.1%. This adjustment reflects the government’s commitment to improving fiscal discipline and managing public finances more effectively.
Central Bank Dividend
A significant dividend payout of over $25 billion from the Reserve Bank of India has enabled the government to reduce the deficit without major cuts to public spending. This financial maneuver highlights the importance of central bank profits in managing the country’s fiscal health.
6. Capital Expenditure: Focus and Allocation
Unchanged Capital Expenditure
The allocation for state-led capital expenditure on infrastructure remains at $134 billion, consistent with the interim budget. However, the budget indicates a shift in focus toward other areas, including employment, small businesses, and social welfare.
Redistributive Nature
Economist Shubhada Rao notes that the budget exhibits a more redistributive approach, with an emphasis on improving social welfare and supporting small businesses. While there may not be a substantial increase in direct cash transfers, measures such as salary credits for new employees and minor tax tweaks could enhance disposable incomes and stimulate economic activity.
Economic Growth Projections
India’s finance ministry projects economic growth of 6.5% to 7% for the financial year ending in March 2025. This forecast represents a slowdown from the previous year’s growth rate of 8.2% and is below estimates from the central bank and international bodies like the International Monetary Fund (IMF) and the Asian Development Bank (ADB). The revised growth outlook underscores the challenges facing the Indian economy as it navigates through global uncertainties and domestic policy changes.
Conclusion
India’s latest budget, presented by Finance Minister Nirmala Sitharaman, marks a pivotal moment for the country’s economic and fiscal policy. With increased taxes on capital gains, substantial investment in employment schemes, tax relief for start-ups and foreign companies, and targeted regional spending, the budget reflects a strategic shift in the government’s priorities. As India moves forward, the impact of these measures on investment, employment, and economic growth will be closely monitored, shaping the future trajectory of the country’s development.
