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Modi’s government pledges fiscal prudence in India’s post-election budget

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Modi’s government pledges fiscal prudence in India’s post-election budget

Nirmala Sitharaman, India’s finance minister, leaves the ministry to present the budget at the parliament in New Delhi, India, on July 23, 2024. 

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India’s government on Tuesday promised spending on job creation but also called for fiscal prudence as it announced its financial budget — the first since nationwide elections finished in June which led to a new coalition government being formed.

India’s finance ministry on Tuesday lowered the country’s fiscal deficit target to 4.9% for the financial year ending March 2025, a revision from 5.1% during the pre-election interim budget published back in February.

That target will then fall to 4.5% or lower for the financial year ending March 2026, India’s Finance Minister Nirmala Sitharaman said during the announcements.

Capital expenditure will remain at February’s target at 11.11 trillion Indian rupees ($133.9 billion) — or 3.4% of GDP in fiscal year 2025 — backing India’s ambitions to enhance its physical and digital infrastructure to become a developed nation by 2047.

Vipul Bhowar, senior director of listed investments of Mumbai-based Waterfield Advisors, said the announcements suggested the government “is steadfast in its commitment to upholding fiscal discipline to enhance the country’s creditworthiness and ensure economic stability.”

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“This is imperative for attracting foreign investment and sustaining growth,” he said, adding that “unprecedented financial support” from the central bank will make the fiscal deficit target possible.

Infrastructure

Sitharaman on Tuesday also spoke extensively on further developing urban India — especially in Bihar and Andhra Pradesh — two cities where key coalition allies of Prime Minister Narendra Modi’s Bharatiya Janata Party have strong support.

While the government will push for more financial support to boost infrastructure and speed up agriculture projects in Andhra Pradesh, Bihar could get new airports, medical colleges and sports facilities.

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“Significant investment the central government has made over the years in building and improving infrastructure has had a strong multiplier effect on the economy,” Sitharaman said in her accompanying budget speech.

“We will endeavor to maintain strong fiscal support for infrastructure over the next five years, in conjunction with imperatives of other priorities and fiscal consolidation.”

Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers told CNBC, that India is “intensifying efforts to become a global manufacturing hub, particularly in sectors such as consumer electronics, automobiles and components, renewable energy, pharmaceuticals, and chemicals.”

“This strategy includes enhancing the ease of doing business and upgrading infrastructure,” Hajra said Tuesday as the announcements were made.

Unemployment

With high unemployment remaining a big and sticky challenge for Modi’s new government, It also proposed Tuesday to spend 2 trillion rupees ($23.9 billion) to increase jobs and boost the quality of education and training in the country.

Unemployment was seen as one of the biggest reasons that caused Modi’s Bharatiya Janata Party to fall short of an outright majority in the country’s lower house of Parliament during the general election in June.

The country’s unemployment rate climbed sharply to 9.2% in June, from 7% the month before, according to the Centre for Monitoring Indian Economy. Sitharaman spoke at great length about attracting fresh graduates to the workforce, pledging to train 2 million young people over five years, and provide a month’s worth of wages (of no more than 15,000 rupees) to first-time employees entering the workforce.

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The finance ministry also put forward a plan to build one 1,000 training institutes, and provide internship opportunities to 10 million youths in the top 500 companies in five years.

Elsewhere, the corporate tax rate on foreign companies is also slated to be reduced to 35% from 40%, the budget outlined. The government also plans to abolish the angel tax for startups.

India’s Nifty 50 and the BSE Sensex reacted negatively to the budget. Both indexes ended the trading day down 0.12% and 0.09% respectively. The Indian rupee on the other hand gained 0.06% to stand at 83.70 against the U.S. dollar.

GDP forecast

India’s economic advisor said Monday that the economy is expected to grow by 6.5% to 7% in the financial year ending in March 2025, lower than the Reserve Bank of India’s 7.2% prediction.

“We are not pessimistic, we are actually very optimistic about growth. But we’re also mindful of the challenges” such as fallout from the monsoon season, financial risks and geopolitical challenges, Chief Economic Advisor V Anantha Nageswaran warned in the press conference ahead of the budget.

As the country strives to be the world’s third-largest economy, it does not have “the luxury of picking and choosing specific approaches” to boost economic growth, the chief economic advisor highlighted.

“No economic approach will be excluded. We need manufacturing, we need services. We need agriculture, we need the public and private sectors to act together. We need union and state governments to act together,” he said.

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