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India's growth budget seeks to boost capex; offers tax relief

Tax benefits have been tweaked to encourage individuals to move towards the new tax regime and to provide relief to the middle class

India's federal budget for 2023-24 has sought to significantly boost capital expenditure to turbo-charge growth in the world's fifth largest economy while offering a spate of incentives under a new income tax regime as the government aims to keep the goal of fiscal consolidation on track.

Finance Minister Nirmala Sitharaman, in her fifth budget presentation in parliament on Wednesday focused on several key sectors, including agriculture, health, infrastructure, education, defence and digital technology, while proposing a number of changes in the income tax slabs in the new tax regime to ensure relief for the middle class. She has boosted capital expenditure by 33 per cent to Rs10 trillion, which is 3.3 per cent of the country's economic output, in the next fiscal year starting April 1.

The budget proposed an increase in the income tax rebate limit from Rs500,000 to Rs700,000 under the new tax regime. Sitharaman pointed out that while the new tax regime would be the default tax regime, taxpayers could opt for the old one. The finance minister also reduced the number of tax slabs in the new tax regime. They are as follows: Tax for income up to Rs300,000 is nil; income above Rs300,000 and up to Rs500,000 to be taxed at 5.0 per cent; income of above Rs600,000 and up to Rs900,000 to be taxed at 10 per cent; income above Rs1.2 million and up to Rs1.5 million to be taxed at 20 per cent; and income above Rs1.5 million to be taxed at Rs 30 per cent. The government will lose Rs350 billion of net tax revenue after the budget tweaked direct and indirect taxes to provide relief to the middle-income group, Sitharaman said.

Budget analysts said tax benefits have been tweaked to encourage individuals to move towards the new tax regime and to provide relief to the middle class, while the maximum marginal rate has also been reduced to 39 per cent from 42.7 per cent to give relief to the highest income strata. While the government is foregoing effective revenue of Rs350 billion, this could have a consumption multiplier effect albeit at the margin, in the economy that's seeing fading consumption growth.

Prime Minister Narendra Modi government’s last full budget before the general election in 2024 targets a budget deficit of 5.9 per cent of GDP for 2023-24, compared to 6.4 per cent for the current fiscal year.

"This is the first budget of Amrit Kaal," Sitharaman declared as she started the presentation of the budget. “The world has recognised India's economy as a bright spot. India's growth is at 7.0 per cent in current fiscal, the highest among major economies. The Indian economy is on the right track, and heading towards a bright future, Sitharaman said in her speech.

While per capita income has increased to Rs197,000, India's economy has grown from 10th to 5th largest in the world in the last nine years, she said.

Some key highlights of the budget include the continuation of the food security programme for another year and steps for agri startups and fisheries; and a welfare programme for primitive, vulnerable, tribal groups. Indian Railways has received a capital outlay of Rs2.4 trillion, the highest ever allocation since 2013-14 while the defence budget will increase to Rs5.94 trillion from last year's Rs 5.25 trillion. Rs 1.62 trillion will be set aside for capital expenditure including purchases of new weapons, aircraft, warships and other military hardware. For the agriculture sector, the government has allocated Rs2.83 trillion promising to boost the income of the farmers and also modernise the sector while a significant allocation of Rs 2.24 trillion has been made for the health sector.

The budget proposes to cap deductions from capital gains on investments in residential houses to Rs100 million. Tax exemption on leave encashment on retirement of non-government salaried employees hiked to Rs 2.5 million from Rs300,000. Maximum deposit limit for Senior Citizen Savings Scheme to be enhanced to Rs3.0 million from Rs 1.5 million. Monthly Income Scheme limit doubled to Rs 900,000 and Rs 1.5 million for joint accounts.

The budget provides an outlay of Rs350 billion to achieve energy transition and net zero objectives and listed green growth among seven priorities of the government. The 50-year interest-free loan to state governments will continue for a year more

The budget proposes a host of hikes and cuts in duties of several products, leading to surge or fall in prices of several commodities. Mobile phones, TV, lab-grown diamonds, shrimp feed, machinery for lithium ion batteries, and raw materials for EV industry will get cheaper while cigarettes, silver compounded rubber, imitation jewellery, articles made from gold bars, imported bicycles and toys, imported kitchen electric chimney, imported luxury cars and EVs will be costlier.