India’s Annual Budget: A Mixed Bag

By Aftab Ahmed and Ira Dugal
MUMBAI (Reuters) – India’s annual budget announcement has garnered significant attention this year. As the first full budget of Prime Minister Narendra Modi’s third term, it is expected to set the tone for how the world’s fifth-largest economy addresses slowing growth and sagging markets.

However, the budget primarily focuses on short-term economic relief via middle-class tax cuts, forgoing broader reform opportunities necessary for igniting rapid growth that once peaked beyond 8%. Additionally, there was a reduction in the government’s focus on capital spending and infrastructure, vital components of India’s growth strategy post-pandemic.

Analysts express disappointment, noting the lack of a strategy to achieve higher growth rates and secure jobs for India’s youth. Madhavi Arora, chief economist at Emkay Global Financial Services, pointed out, “India aspires for 8% growth but lacks a growth strategy.”

India’s GDP growth is projected to decline to a four-year low of 6.4% in the current financial year, down from 8.2% in 2023-24. Although the latest tax cuts may benefit urban consumers struggling with low wages and high living costs, economists argue that deeper issues require attention.

“Achieving 8% growth will necessitate substantial interventions in agriculture, human capital, and business practices,” said Dhiraj Nim, an economist at ANZ Research.

Since returning to power in July with a weaker mandate, Modi has catered to politically significant groups, reversing agricultural trade policies, providing cash handouts to women, and now enacting tax cuts for the middle class.

Analysts note that Modi’s government has historically avoided pushing economic reforms that may not yield immediate benefits to a broad voter base. In 2019, the BJP boasted over 300 parliamentary seats but chose political expediency over necessary reforms.

Despite calls for reform from government advisors, including Chief Economic Adviser V. Anantha Nageswaran, the government’s recent actions present a risk of stagnation. He urged for easing rules around land, labor, and industrial sectors, highlighting the danger in maintaining the status quo.

The budget’s 1 trillion rupee ($11.56 billion) cost for tax cuts limits the government’s capacity to increase infrastructure spending, which is essential for long-term growth. Current capital expenditure plans remain stagnant despite hopes for investment-driven recovery initiated after the pandemic, leading to persistent job creation struggles.

Market responses to the budget reveal apprehensions, as slower capital spending negatively impacted capital goods firms. Nomura’s chief economist for India, Sonal Varma, commented on the shift towards consumption support through tax cuts instead of public infrastructure investment, reflecting difficulties in executing major projects.

($1 = 86.5360 Indian rupees)