(Bloomberg) -- Prime Minister Narendra Modi pledged 2 trillion rupees ($23.9 billion) to boost jobs and improve education in India, increased spending to his new allies, while also targeting a smaller fiscal deficit for this year.
The government will focus on employment, skilling, small businesses and the middle class in the fiscal year through March 2025, Finance Minister Nirmala Sitharaman said in her budget speech Tuesday. She announced a number of employment-linked incentives for businesses to help spur jobs.
The budget is the first under a new coalition government led by Modi after his party lost its majority in elections. Joblessness and the high cost of living despite India’s rapid economic growth emerged as key voter concerns.
“This budget strengthens every section of the society,” Modi said in a televised address after the budget. “It has brought new opportunities and energy and with it new jobs and self employment opportunities.”
The prime minister is seeking to shore up voter support and balance the demands of his coalition partners without blowing out the budget deficit. Curbing the deficit and government debt will be key to raising India’s credit ratings, which are currently at the lowest investment-grade level.
Sitharaman said the government will narrow the deficit to 4.9% of gross domestic product in the current financial year, lower than her February projection of 5.1%. She also pledged to curb the deficit gradually over time.
“The fiscal consolidation path has served our economy very well and we aim to reach the deficit below 4.5% next year,” she said. “The government is committed to staying the course.”
Lower fiscal deficit is a step in the “right direction,” but India will need to reduce its debt-to-GDP levels to win a ratings upgrade, Gene Fang, associate managing director, sovereign risk at Moody’s Ratings, said in an interview. Moody’s has a Baa3 rating on India, the lowest investment grade, with a ‘stable’ outlook.
What Bloomberg Economics Says
Overall, we believe the budget adds stimulus for private capex and, together with increased fiscal spending of 550 billion rupees, could add an upside of 0.2 percentage point to our fiscal 2025 growth projection of 7%.
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Abhishek Gupta, India economist
A revenue windfall this year has boosted the government coffers, giving it ample resources to boost spending while keeping the fiscal deficit under control. The Reserve Bank of India paid the government a record $25 billion dividend, while tax revenues have surged on the back of a stronger economy.
Gaura Sen Gupta, an economist at IDFC First Bank Ltd., said the budget was “growth supportive,” with the government keeping its focus on infrastructure spending and supporting states with more funding.
“The RBI dividend which was significant, provided fiscal space of 0.4% of GDP,” he said. “Some of that fiscal space was channeled in supporting rural economy, employment and state governments.”
The smaller deficit means the government will cut its borrowing for the year slightly to 14.01 trillion rupees this year. Yields on India’s 10-year bond dropped to its lowest level since April 2022 after the news, before reversing their declines. Stocks fell after the minister announced an increase in capital gains tax on some equity investments, with the NSE Nifty 50 Index falling as much as 1.8%.
Modi allocated 150 billion rupees in financial aid through multilateral agencies to one of his key allies, the Telugu Desam Party, which governs the southern state of Andhra Pradesh. For a second ally, which runs Bihar state, the government will give an additional allocation to build new airports, medical colleges and sports infrastructure, Sitharaman said. Requests from Bihar for aid from multilateral banks will also be expedited, she said.
The government is “balancing political and economic needs by supporting allies through capex spend and financing help through multilateral agencies,” said Shreya Sodhani, an economist at Barclays Plc.
Other key highlights of the minister’s speech:
- Capital expenditure in the fiscal year through March 2025 will reach 11.1 trillion rupees, unchanged from February’s forecast
- Government to allocate 2.66 trillion rupees for rural development
- Customs duty on gold will be cut to 6%
- Government to undertake comprehensive review of Income Tax Act
- Corporate tax on foreign companies reduced to 35% from 40%
- Personal income tax rate slabs adjusted, and minimum threshold for deductions raised
- Taxes on capital gains made through equity investment raised
--With assistance from Shruti Srivastava, Anup Roy and Shadab Nazmi.
(Updates with prime minister’s comment in fourth paragraph)
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