Indian President Modi spends billions on jobs, allies in post-election budget | Business & Economic News

The Indian government has allocated billions of dollars for job creation and regions run by key coalition partners in a budget aimed at consolidating the coalition and winning back voters after Prime Minister Narendra Modi's electoral failure.

Tax changes unveiled in the budget on Tuesday included a higher tax on equity investments to ease concerns about a possible overheating market and lower taxes for foreign companies to attract more investment.

The $576 billion total spending included $32 billion on rural programs, $24 billion to be spent over five years to create jobs and more than $5 billion for two states led by coalition partners.

In this budget, we are particularly focusing on jobs, skills, small businesses and the middle class, Finance Minister Nirmala Sitharaman said on Tuesday.

The government will also implement reforms in all factors of production, including land and labour, she said.

Subsequent budgets will continue to focus on these areas, Sitharaman said while presenting her seventh annual budget.

Despite the new spending, India cut its budget deficit target to 4.9% of gross domestic product for the fiscal year ending March 31, 2025, from 5.1% in February's interim budget, helped by a large $25 billion central bank surplus.

The government also slightly reduced gross market borrowing to 14.01 trillion rupees ($170 billion).

Difficult reforms

Economists have blamed rural woes and a weak jobs market for the weak poll results, which cost Modi his overall majority in the Bharatiya Janata Party (BJP). They have repeatedly said that land and labour reforms are essential for India to maintain strong economic growth.

Asia's third-largest economy grew 8.2 percent last fiscal year and the government is forecasting growth of 6.5 to 7 percent this fiscal year, according to a report released Monday.

Sakshi Gupta, principal economist at HDFC Bank, said the budget has managed to strike a balance between policies to support growth and maintaining fiscal discipline.

However, implementing more ambitious reforms will be a challenge for the coalition, Gene Fang, associate managing director for sovereign risk at Moody's Ratings, told Reuters.

Previous attempts to make it easier for companies to acquire land and lay off staff have repeatedly met with opposition from states concerned about the protests such measures could provoke.

Among the measures to boost employment, the budget includes incentives for companies to train their staff, as well as cheaper loans for higher education, Sitharaman said.

India's urban unemployment rate is 6.7 percent, but the private agency Centre for Monitoring Indian Economy puts it higher at 8.4 percent.

The budget also keeps spending on long-term infrastructure projects at 11.11 trillion rupees ($130 billion), with states being allocated 1.5 trillion rupees ($18 billion) in long-term loans to finance this spending. Some of these will be linked to reforms in areas such as land and labour, which the government intends to implement in its third term, Sitharaman said.

In a concession to government allies, Sitharaman said she would expedite loans from multilateral agencies for the eastern state of Bihar and the southern state of Andhra Pradesh.

Higher taxes

India has raised its tax rate on equity investments held for less than a year from 15% to 20%, while the tax rate on investments held for more than 12 months has been increased from 10% to 12.5%. The taxes will be applicable from Wednesday.

The government has also increased the tax on stock derivatives transactions that have attracted retail investors, which will be implemented from October 1.

Stocks and the rupee declined after the budget announcement but recovered most of the losses, with major stock indices ending the day down around 0.13%.

The tax changes had a short-term negative impact on the market, but could prove profitable in the long run, said Vineet Arora, investment manager at Singapore-based NAV Capital Emerging Star Fund.

This should help stabilise the market and attract investors with a long-term perspective on the Indian economy, Arora said.

Corporate taxes for foreign companies were cut from 40% to 35% in a bid to encourage more investment, while a lower tax burden on low-income consumers, meant to encourage spending, helped push consumer stocks to record highs.