India offers middle-class tax relief to support growth; targets narrower budget gap
The world's fifth-largest economy is expected to post its slowest growth in four years next year amid frail urban demand and weak private investment, while stubbornly high food inflation has dented disposable incomes
Summary:
- India gives tax relief to boost spending power of middle class
- Fiscal deficit for 2025-26 seen at 4.4% from 4.8% this year
- Missions to boost farm productivity, manufacturing, exports
- FDI limit in insurance sector raised to 100% from 74%
India plans to cut personal income tax rates to boost middle-class spending power, Finance Minister Nirmala Sitharaman said on Saturday, as she announced an annual budget that also sought to increase private investment to strengthen growth.
The world's fifth-largest economy is expected to post its slowest growth in four years next year amid frail urban demand and weak private investment, while stubbornly high food inflation has dented disposable incomes.
Keep updated, follow The Business Standard's Google news channel
Measures to assist the poor, youth, farmers and women were also included in the budget for 2025-26, Sitharaman said, highlighting plans for "transformative reforms in taxation".
The government said people earning up to 1.28 million rupees ($14,800) per year will not have to pay any taxes, raising its threshold from 700,000 rupees. It also lowered tax rates for people earning above the new threshold, with the measures to cost around 1 trillion rupees in tax revenues, Sitharaman said.
India has faced a bout of high food inflation over the past year. Retail inflation in December eased to a four-month low of 5.2% but inflation in food, which accounts for nearly half of the consumption basket, continued to remain high at 8.39% in December.
The government, however, continued to improve its finances, targeting a fiscal deficit of 4.4% of GDP in 2025-26, down from a revised 4.8% of GDP in the current year.
The government will borrow 14.82 trillion Indian rupees ($171 billion) via the bond markets to fund this year's fiscal deficit.
To balance the revenue lost, the government has budgeted for a modest increase in capital spending this year, which will rise to 11.21 trillion rupees in 2025-26 compared to a revised 10.18 trillion in the current year.
REFORMS SOUGHT
The country's chief economic adviser, in a report released on Friday, forecast India's economy would remain sluggish in the fiscal year beginning April 1, advocating long-delayed reforms in areas such as land and labour to boost medium-term growth.
While near-term growth is in line with the 10-year average, India needs a growth rate of 8% to meet its longer-term economic goals and create enough jobs for its large, youthful population.
Economists have suggested the government ease the burden on individuals through tax cuts on income and energy products and to build on the $24 billion programme of job creation schemes announced in the first post-election budget in July.
The Nifty 50 and the BSE Sensex swung between gains and losses as the finance minister presented her budget. They were both last trading down 0.1% at 23,491 points and 77,443 points, respectively, as of 12:23 p.m. IST.
FOCUS ON FARM, MANUFACTURING AND FINANCIAL SECTOR
India has faced a bout of high food inflation over the past year. Retail inflation in December eased to a four-month low of 5.2% but inflation in food, which accounts for nearly half of the consumption basket, continued to remain high at 8.39% in December.
To boost productivity across the farm sector, the government will launch a national mission to push high-yielding crops, with a special focus on pulses and cotton production.
To help farmers, the limit for subsidised credit has been raised to 500,000 Indian rupees ($5,778) from 300,000 rupees earlier.
The government will also launch missions to push manufacturing and exports, Sitharaman said, without going into details.
India has long aimed to boost the share of manufacturing and exports in its economy but has had little success. The share of manufacturing in the economy has remained close to 17%, short of its long-standing goal of 25%.
To deepen the penetration of insurance in the economy, the foreign direct investment limit on insurance was raised to 100% from 74% currently.
