India is poised to navigate its slowest economic expansion in four years, grappling with stagnant wages and escalating food prices. The country's economic growth is projected to decelerate to between 6.3% to 6.8% for the financial year ending March 2026. As the Indian government unveils its first full-year budget following the Prime Minister's party losing an outright majority in parliament last year, it aims to counteract these economic hurdles through a series of strategic measures.
The newly presented budget is designed to tackle slowing growth, rising prices, and diminishing consumption amongst the middle class. One significant change includes an increase in income tax exemption limits, allowing individuals to earn up to 1.2 million rupees tax-free. This move is expected to provide much-needed relief to a segment of the population that has faced financial pressure due to high inflation.
Additionally, small and micro industries are set to benefit from fiscal support amounting to 1.5 trillion rupees over the next five years. This initiative aims to stimulate growth within these vital sectors, which are crucial for job creation and economic stability.
State-funded capital expenditure on infrastructure projects—such as roads, ports, and railways—has been a cornerstone of India’s economic strategy since 2020. The government has modestly increased its infrastructure expenditure target for the current year from 11.1 trillion to 11.2 trillion rupees. These projects not only enhance connectivity but also contribute significantly to economic growth.
In an effort to attract more foreign investment, the budget has raised foreign direct investment limits for the insurance sector from 74% to a full 100%. This change is anticipated to invigorate foreign interest in India's burgeoning insurance market.
"This will aid foreign insurers' interest in investing in the growing Indian insurance market, where we expect strong premium growth to boost profitability," – Mohammed Ali Londe, Senior analyst at Moody's Ratings.
The Reserve Bank of India (RBI) has maintained its policy rates at 6.5% since February 2023, striving to strike a balance between curbing inflation and supporting economic growth. To further bolster the banking system amid a cash shortage, the RBI plans to inject $18 billion into domestic banks.
Despite these measures, the government's commitment to fiscal discipline remains firm. It aims to reduce its deficit from 4.8% this year down to 4.4% by 2026. This commitment reflects the ongoing challenge of managing public finances while stimulating growth.
Furthermore, the budget outlines ambitious energy goals, including a Nuclear Energy Mission with a budget allocation of 200 billion rupees aimed at generating 100 gigawatts of nuclear energy by 2047. This initiative not only addresses energy security but also supports sustainable development efforts in line with global environmental standards.
However, the reality of taxation in India remains stark; only 1.6% of Indians—approximately 22.4 million people—paid income taxes in 2023. This statistic underscores the challenges faced by the government in broadening its tax base and ensuring that fiscal policies effectively reach a wider audience.