(Feb 1): India’s finance minister unveiled a relatively cautious budget on Sunday, focusing on economic stability in the face of rising global risks.
Finance Minister Nirmala Sitharaman boosted spending on manufacturing and infrastructure projects while keeping the government’s fiscal deficit and debt under control. There were no big-bang announcements to spur the economy this time around, unlike in previous years when she cut taxes and eased restrictions for foreign investors.
Stocks slumped after Sitharaman hiked taxes on some equity transactions and announced a record borrowing plan for the next financial year. Even so, analysts saw the budget as providing a measure of predictability that investors needed in uncertain times.
“In a year marked by global trade volatility and aggressive US tariffs, the government’s adherence to fiscal consolidation — aiming for a deficit glide path near 4% — is the ‘stability premium’ foreign investors were looking for,” said Vaibhav Mittal, a partner at Khaitan & Co. By avoiding populist excesses and focusing on ‘fiscal prudence and monetary stability,’ the budget provides the predictability required” to curb foreign inflows and bolster the rupee.
India’s economy, among the fastest-growing in the world, is facing a more uncertain outlook because of global risks stemming from high US tariffs. US President Donald Trump’s 50% tariffs on Indian goods have curbed exports from the country’s biggest market, widened the trade deficit and caused the rupee to slump to a record low.
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Indian Prime Minister Narendra Modi has called for more self-reliance, boosting investment in manufacturing and undertaking reforms like tax changes and cutting red tape to lure foreign businesses to the country. Modi’s government has also rushed to clinch trade agreements with other regions, including a major deal with the European Union last week, to offset the US threat.
Sitharaman said the budget deficit will ease to 4.3% of gross domestic product (GDP) in the fiscal year beginning April 1, from an estimated 4.4% in the current year. Government debt will be brought down to 55.6% from 56.1%, respectively, she said.
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The finance minister, who took office in 2019, has pledged to steadily lower the deficit over time after it climbed above 9% of GDP during the pandemic. That fiscal path has led to a gradual improvement in India’s credit rating.
“Our first duty is to accelerate and sustain economic growth by enhancing productivity and competitiveness and building resilience to volatile global dynamics,” Sitharaman told lawmakers in New Delhi on Sunday.
Sitharaman highlighted several manufacturing initiatives, including for critical minerals, electronics manufacturing, pharmaceuticals and others. She also focused on measures to promote small businesses and build roads, railways, airports, ports, and logistics infrastructure.
The government said last week that it expects the economy to expand 6.8% to 7.2% in the coming fiscal year, lower than the current year’s 7.4%. Economists surveyed by Bloomberg News predict growth of 6.6%.
“The budget was largely non-eventful, which is okay, because it doesn’t disturb the macro stability of the economy,” said Madhavi Arora, an economist with Emkay Global Financial Serv Ltd.
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Other key highlights of the budget:
- Despite the lower fiscal deficit, the government plans to borrow a record 17.2 trillion rupees in the coming fiscal year;
- The government will increase its programme for the electronics component sector to 400 billion rupees;
- The tax on some equity transactions was raised to 0.05% from 0.02%;
- The government will invest 100 billion rupees in biopharmaceutical research over the next five years;
- Defence-related capital spending — for acquiring new military hardware and other assets — was raised by 18% for the next financial year.
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