Modi’s new Budget: Analyzing India’s fiscal roadmap

India (Commonwealth Union)_ India’s Finance Minister, Nirmala Sitharaman, unveiled the Union Budget for the fiscal year 2024-2025, marking a pivotal moment for the nation amidst economic and employment challenges and political dynamics. Presented after a closely contested election, this interim budget reflects a more refined approach towards economic growth, employment generation, and sectoral development. Accordingly, the new spending plan has replaced the temporary interim budget that took effect on April 1st. During her seventh consecutive Budget presentation, India’s Finance Minister Nirmala Sitharaman unveiled plans to increase expenditure, generate employment, and provide tax relief to the middle class.

Accordingly, significant adjustments were also implemented in the realm of taxation, alongside the introduction of loans up to Rs 10 lakh for higher education within the country. Additionally, in a move aimed at bolstering the start-up ecosystem, the government eliminated angel tax for all categories of investors. This decision is particularly beneficial for young start-ups, easing their financial burden by removing this tax amidst their operational costs. Furthermore, the government’s reduction of customs duty to 6% is anticipated to lower prices of gold and silver items. Additionally, a decrease in customs duty to 15% is expected to result in reduced prices for mobile phones.

Overview of budget priorities

The interim budget outlines a strategic departure from its interim predecessor, emphasizing increased allocations for rural development, skill enhancement, job creation, education, taxation, space research, youth development, MSMEs, women empowerment, urban development, energy security, agricultural reforms, etc. These initiatives underscore Prime Minister Narendra Modi’s administration’s commitment to addressing core socio-economic and employment challenges and fostering inclusive growth.

Key budget announcements

Taxation reforms

• Long-term capital gains tax has been raised to 12.5% from 10%, impacting both financial and non-financial assets held over a year.

• Short-term capital gains tax sees an increase from 15% to 20%, aligning with efforts to curb speculative activities.

• These reforms were made based on the recently released Economic Survey.

Employment and skilling initiatives

• The interim budget introduces a $24 billion employment plan over five years, focusing on incentivizing formal sector job creation and manufacturing.

• First-time job entrants in the formal sector will receive a direct cash transfer equivalent to their monthly salary, alongside other targeted incentives for employers.

Sector-specific allocations

• Significant financial support has been allocated to states crucial to the ruling coalition, such as Bihar and Andhra Pradesh, for infrastructure and developmental projects.

• Initiatives include new airport developments, road expansions, and power projects, bolstering regional infrastructure.

Fiscal discipline and economic growth

• The budget aims for a reduced fiscal deficit target of 4.9% of GDP, down from the previously projected 5.1%, demonstrating prudent fiscal management amidst economic pressures.

• A substantial dividend from the central bank has aided in managing the deficit without compromising on developmental expenditures.

Incentives for middle classes and foreign corporates

• Personal income tax reforms include minor tweaks aimed at providing tax relief to the middle class, potentially saving taxpayers up to ₹17,500 annually under the new regime.

• Corporate tax rates for foreign companies have been lowered from 40% to 35%, incentivizing foreign direct investment and promoting industrial growth.

• Notably, the angel tax on capital raised by startups has been abolished, aiming to stimulate entrepreneurship.

Future economic projections

• The allocation for state-led capital expenditure on infrastructure creation remains consistent at $134 billion, unchanged from the figure announced in the interim budget.

• Economic growth for the fiscal year 2024-25 is projected between 6.5% and 7%, acknowledging global economic uncertainties and domestic structural reforms.

• The budget outlines a strategic roadmap to enhance revenue generation and reduce fiscal deficits in the coming years.

Other key budget announcements:

• India’s Finance Minister Sitharaman has initiated a six-month review of the Income Tax Act 1961 to streamline and simplify it, aiming to reduce disputes and provide certainty in taxation. This move follows the significant uptake of simplified tax regimes, which contributed 58% of corporate tax and over two-thirds of personal income tax in FY 2022-23.

• In a bid to expand the space economy, Sitharaman outlined plans to increase it fivefold over the next decade, supported by a Rs 1,000 crore venture capital fund.

• A new initiative will also encourage private-driven research at scale with a financial backing of Rs 1 lakh crore.

• Under the Prime Minister’s package, the government will launch a scheme to provide internships to one crore youth over five years, offering ₹5,000 per month and a one-time assistance of ₹6,000.

• Companies will cover training costs and 10% of the internship expenses through CSR funds.

• To stimulate job creation in the manufacturing sector, Sitharaman introduced a scheme incentivizing the hiring of first-time employees, aiming to create 50 lakh new jobs.

• A new credit guarantee scheme was announced for MSMEs in manufacturing, facilitating term loans up to ₹100 crore without collateral.

• Further emphasizing women’s participation in the workforce, Sitharaman unveiled plans to establish working women’s hostels, enhance skilling programs, and improve market access for women-led enterprises.

• Additionally, a PM Package was introduced featuring five schemes with a ₹2 lakh crore allocation to boost employment and skilling efforts, focusing on various sectors including manufacturing and formal employment.

• This year’s allocation includes ₹1.48 lakh crore for education, employment, and skilling initiatives.

The Union Budget 2024-25 reflects a comprehensive strategy to navigate complex economic challenges while laying the groundwork for sustainable growth and development. By prioritizing job creation, enhancing infrastructure, and reforming taxation policies, the government aims to bolster investor confidence, stimulate consumption, and propel India towards its envisioned economic trajectory. However, amidst these ambitious initiatives, the interim budget faces scrutiny over its efficacy in addressing immediate employment concerns and revitalizing key sectors. The emphasis on fiscal care, coupled with targeted investments in critical sectors, underscores the government’s commitment to achieving inclusive and equitable growth.

As India navigates the post-pandemic economic landscape, the Union Budget serves as a critical blueprint for economic revival and long-term sustainability. Its success will hinge on effective implementation, adaptive policy responses, and collaborative efforts between government, industry, and society at large. Overall, while challenges persist, the Union Budget 2024-25 presents a forward-looking vision aimed at propelling India into a new era of economic resilience and prosperity.