Finance Minister Nirmala Sitharaman on Tuesday presented the first full Union Budget for Narendra Modi-led BJP’s third term. The poor, youth, women, and farmers were at the focus of the budget for fiscal year 2024-25, aligning with the interim budget presented in February this year. The government has promised increased spending, job creation, relief to the middle class, and significant changes in tax brackets and rates.
Finance Minister Nirmala Sitharaman has announced a comprehensive review of the Income Tax Act of 1961 to benefit the middle class. While tax slabs have been revised, the government has also increased the Standard Deduction under the New Tax Regime from Rs 30,000 to Rs 75,000. The deduction on family pensions for pensioners has also been raised from Rs 15,000 to Rs 25,000.
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In a surprising move, capital gains taxation has been revised upwards. The short-term gains tax on specified financial assets has been increased from 15% to 20%, while rates on other financial and non-financial assets remain unchanged. Additionally, the long-term gains tax on all assets has been raised to 12.5% from the previous 10%. The government has also raised the exemption limit on capital gains for certain listed financial assets from Rs 1 lakh to Rs 1.25 lakh annually.
The stock market reacted negatively to these changes.
Among major tax announcements, the government has abolished the angel tax for all investor classes to support start-ups and innovation.
Union Budget’s Infrastructure push
The government has announced a renewed focus on employment, skilling, MSMEs, and the middle class. Infrastructure is one of the nine priority areas announced in the budget. Analysts had called for improvements in infrastructure and logistics, as well as incentives for research and development spending to help India catch up with its Asian competitors.
For rural development, a priority in this budget, Rs 2.66 lakh crore has been earmarked for rural infrastructure projects. Although subdued growth in rural India has not significantly impacted India’s near-term growth, it could become a concern in the future.
FM Sitharaman has also announced efforts towards implementing Digital Public Infrastructure (DPI) in agriculture, aiming to cover farmers and their lands within a three-year timeframe.
Under the larger goal of bolstering infrastructure, a new initiative called Purvodaya is on the cards. While the eastern states of the country are known for their abundant resources and rich cultural heritage, they are currently underutilised. Purvodaya aims to rectify this by aiding comprehensive development in Bihar, Jharkhand, West Bengal, Odisha, and Andhra Pradesh.
Enhancements to road connectivity, including projects such as the Patna-Purnea Expressway, the Buxar-Bhagalpur Expressway, spurs to Bodhgaya, Rajgir, Vaishali, and Darbhanga, and an additional two-lane bridge over the Ganga River at Buxar, with a total investment of Rs 26,000 crore, have also been announced.
Custom Duty Cuts
The common man will find relief in various duty cuts announced in the Budget. Customs duty is now fully exempted on three additional cancer medicines. The duty on mobile devices and accessories has been reduced to 15%.
Given the high share of personal tax in overall direct-tax collections, it was expected that the government would avoid introducing measures that would greatly reduce tax revenue.
Women
India is one of the few nations benefiting from a demographic dividend, but to leverage its full potential, economists have emphasised increasing women’s participation in the labourforce. To that end, FM Sitharaman has announced initiatives to support women. The government plans to establish hostels and make collaborations aimed at developing specialised skill training programs for women. Moreover, to promote women-led development, the budget allocates more than Rs 3 lakh crore for schemes benefiting women and girls.
Education
The budget allocations for education include financial support for education loans of up to Rs 10 lakh for higher education in domestic institutions, at an interest rate of 3%. FM Sitharaman also announced an allocation of Rs 1.48 lakh crore for the education sector, jobs, and skill development sectors. The R&D sector is also a part of the nine priorities announced in the current budget.
To support basic research and prototype development, the government will establish the Anusandhan National Research Fund. Previously, the government announced the creation of a Rs 1 lakh crore financing pool in the interim budget. This initiative aims to incentivise private sector involvement in research and innovation at a commercial scale. Private companies will be encouraged to invest in developing and bringing new technologies and products to market, supported by this dedicated funding pool.
Budget Expectations: Where they Failed
The recently announced Budget was eagerly awaited as it was the ruling party’s first budget after the Lok Sabha elections. The results of the recent elections indicated that voters were not particularly happy with BJP’s economic policies during its second term from 2019-24. The government also faced challenges from the opposition, as it now has 240 seats in the Lok Sabha, down from 303 in 2019. Thus, it cannot afford to sideline coalition politics and the aspirations of regional coalition partners.
The Budget was expected to introduce concrete measures to address unemployment, a significant economic issue with an unemployment rate of 9.2%. Supporting employment-intensive activities, such as construction, could augment income and demand in the short term.
Additionally, resolving inflation, particularly sticky food inflation, and encouraging private sector investment should have been top priorities. Strengthening storage and transport infrastructure, fast-tracking efforts in food processing, and developing climate-resistant crops are imperative for enduring reductions in food inflation.
While the government has not sidelined these issues, it remains to be seen whether the Budget will have any meaningful impact on these challenges.
Moreover, the Budget could not afford to neglect overarching issues such as heightened global uncertainty, elevated food inflation amid climate risks, and slow recovery in private investment. Although these issues were highlighted in the Economic Survey, not many policy amendments were undertaken to address them.
India must be wary of geopolitical uncertainties, increased indebtedness, and escalating tariff friction. These risks may have a trickle-down effect on the Indian economy, as India has become more integrated with the global economy in terms of trade and capital flows. The only solution to this problem is to build strong external and fiscal buffers.