Modi’s Growth Agenda Flexes to Meet Needs of Allies

India’s annual budget is typically an exercise in incremental updates and revisions to the nation’s spending and taxation plans. Rarely are there watershed moments and that’s particularly the case in general election years. 2024 was different. The pre-election interim budget in February was a unexpectedly mundane affair and absent of populist announcements aimed at winning over voters. The post-election final budget, however, was more interesting. It tackled some of the key themes that surfaced in the vote that helped to shape the surprising outcome in which Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) failed to secure a majority and had to rely on support from allies to form a coalition.

Below we summarize the key features and messaging in the post-election budget and give our assessment as to whether it signals Modi’s decade-long structural growth agenda remains intact or could start to be diluted to meet his coalition’s demands. 

Our Budget Take

A lack of job growth and muted consumer sentiment among lower income groups have been cited as the two key reasons for the underperformance of Modi’s BJP in the election. Both are issues of high importance to Modi’s key allies in India’s new coalition – the Telugu Desam Party and the Janata Dal (United) party. Not surprisingly, Modi’s government prioritized tackling both issues in the budget.

Firstly, it announced measures to boost consumption in the form of reduced direct tax at the lower end of income-related groups and a cut in gold import duty (from 15% to 6%). It didn’t go overboard, in our view; there were no direct handouts, and spending toward rural programs remains unchanged from the interim budget.

“There was strong signaling that the government, in our view, intends to increase the tax take on the rich and lessen it on the poor, and it could well stay this course for the near future.”

On job creation, the government announced it would allocate 2 trillion rupees (US$23.9 billion) to employment-linked programs encouraging enrolment and upskilling, and there was also continuation and elevation of credit support to micro, small and medium enterprises (MSME). Both measures could be positive for GDP growth as well as jobs.

Crucially, in spite of the above measures, the government managed to bring its fiscal deficit guidance for FY25 down from 5.1% in the interim budget to 4.9% in the final budget, compared with a fiscal deficit of 5.6% for FY24. The improved guidance was supported by robust tax collection and a higher-than-expected Reserve Bank of India (RBI) dividend and further consolidates the government’s already healthy financial position. The government’s FY26 fiscal deficit target is 4.5%.

The BJP also navigated other demands from its key coalition partners. For example, there was higher infrastructure creation support allocated to states like Andhra Pradesh and Bihar where its allies are based. Asset creation initiatives, rather than handouts, are a preferable longer-term structural development move, in our view.  

Elsewhere, a notable change was in capital gains tax (CGT). On equity investments, both long term and short-term CGT was increased: the former was raised to 12.5% from 10% and the latter was increased to 20% from 15%. On real estate, CGT was reduced but indexation benefits were removed, effectively increasing the tax burden. Taken together, these moves represented strong signaling from the government, in our view, that it intends to increase the tax take on the rich and lessen it on the poor, and it could well stay on this course for the near future albeit with some tweaks and revisions.

In addition, there were announcements related to the government’s medium-term agenda, including: simplification of taxes over the coming six months; brownfield development in cities; investment in energy security; and continued focus on innovation, details of which the government says it will disclose over the next few months.

Conclusion

On balance, while there were initiatives—including the increase in CGT—that may negatively impact markets in the near term, we believe investors should adopt a neutral view of this budget. In our view it signals that the BJP doesn’t intend to deviate too much from its economic ideology in order to accommodate demands from coalition partners but will be flexible enough to address on-the-ground realities of economics and politics. The strategy may also help the party remain in power for longer which is imperative for it to achieve some of Modi’s ambitious goals. 

Swagato Ghosh
Portfolio Manager
Matthews Asia

Sources: Economic Times, Mint, India Today, Financial Express, Hindu BusinessLine, Bloomberg, Reuters, as of July 25, 2024.