(Bloomberg) — India’s finance minister gave middle class consumers 1 trillion rupees ($11.5 billion) in tax relief in her budget Saturday, seeking to shore up a slowing economy as global risks worsen.
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Individuals with annual income up to 1.2 million rupees will effectively be exempt from paying income tax, Finance Minister Nirmala Sitharaman told lawmakers in New Delhi, raising the cap from 700,000 rupees. She also announced a slightly smaller budget deficit for the coming fiscal year, with a modest increase in infrastructure spending.
The tax changes will affect 10 million individuals, increasing the number of those paying zero income tax to 60 million, or about 74% of all taxpayers. The move will “substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment,” the minister said.
The budget comes against the backdrop of India’s weakest economic growth since the pandemic and rising geopolitical risks as US President Donald Trump roils global trade with threats of widespread tariffs. Investors have already wiped about $600 billion from India’s stocks in the past month.
The government estimated growth of just 6.4% in the current fiscal year — well below the 8% annual growth needed for Prime Minister Narendra Modi to meet his ambitious economic goals of making India a developed nation by 2047. The economy is expected to expand 6.3%-6.8% in the coming fiscal year.
Despite the revenue loss from tax cuts, Sitharaman still managed to target a lower budget deficit in the coming year of 4.4% of gross domestic product, slightly below the 4.5% previously estimated. An increase in transfers from the central bank and government-owned financial institutions will partly help to offset the drop in tax revenue. The deficit would be funded through slightly higher-than-expected bond sales of 14.82 trillion rupees.
On the spending side, the government underspent on its capital expenditure this year, resulting in a smaller budget deficit of 4.8% of GDP, compared with a previous estimate of 4.9%. Capital spending is projected to grow 10% to 11.2 trillion rupees in the coming fiscal year.
“Our endeavor will be to keep the fiscal deficit each year such that the central government debt remains on a declining path as a percentage of the GDP,” she said, projecting debt of 50% of GDP by March 2031.
Curbing the fiscal deficit and government debt will be key to raising India’s credit rating, which is currently at the lowest investment grade level. Moody’s Ratings said Saturday the fiscal plan outlined by the finance minister doesn’t warrant a change in the credit rating just yet.
What Bloomberg Economics Says…
“By giving consumption a big boost, the government is signaling it wants private investment to play a bigger role in lifting growth. And to fund this, it is reducing day-to-day current expenditures and refraining from new populist welfare measures.”
— Abhishek Gupta. To read the full note, click here
Economists had mixed responses to the budget, with many saying the tax cuts would help lift consumption, but revenue targets going forward appeared ambitious. The infrastructure spending targets also disappointed investors expecting bigger allocations.
The NSE Nifty 50 Index ended 0.1% lower, after swinging between gains and losses, with shares of consumer firms, lower-end automobiles and retail chains rising.
“The government’s decision to shift away from public capex to boosting purchasing disposable income is well timed in an environment where domestic growth levers have to be pulled to counter cyclical slowdown,” said Anubhuti Sahay, an economist with Standard Chartered Plc.
Sonal Varma, an economist at Nomura Holdings Inc., said the growth impulse from the budget would be “marginally positive” for the coming fiscal year. The government’s fiscal prudence will also provide greater leeway for the central bank to begin lowering interest rates, possibly as soon as next week, she said.
Sitharaman began her speech in the parliament with loud protests from opposition lawmakers about different schemes announced by the minister. The main opposition Indian National Congress, which has almost doubled its seats in the lower house after last year’s election, has pushed for more debate in the parliament about issues such as joblessness and corruption allegations against billionaire Gautam Adani, who is perceived to have close ties to Modi.
Shashi Tharoor, a lawmaker from the Congress party, said the tax cuts would benefit those who earn a salary, but doesn’t address the plight of millions who are unemployed.
“For you to benefit from income tax relief, you actually need jobs,” he said. “Unemployment was not mentioned by the finance minister in her speech.”
The Modi government presented its third term first full-year budget when the global competitive landscape is set to be disrupted. Follow Bloomberg India on WhatsApp for exclusive content and analysis on India’s pitch to the world. Sign up here.
–With assistance from Swati Gupta, Alex Gabriel Simon, Abhijit Roy Chowdhury and Siddhartha Singh.
(Updates with number of people benefiting from tax changes in third paragraph)
