Modi’s 2024-2025 Budget: Explained

New Delhi, India

India will spend $580 billion (48.2 trillion rupees) in the 2024-2025 financial year, an 8.55% increase from the previous year. The budget will be financed by the expected $460 billion (38.4 trillion rupees) in gross tax revenue in 2024-2025, a 14% year-over-year increase driven by economic growth, and a 4.9% of GDP fiscal deficit, declining from 5.6% of GDP in 2023-2024. The RBI also gave the government a record-high dividend of $25 billion (2.1 trillion rupees); the RBI gives an annual dividend to the Indian government from money earned on securities and investments. This year, the Indian government will be able to spend more while borrowing less.

Taxes: India will be reducing its corporate tax on foreign companies from 40% to 35% in a bid to lure FDI. This is still steeper than the corporate tax rates on domestic companies, which is 30% for large companies and 25% for companies earning less than $120,000 (10 million rupees), reflecting India’s protectionist tendencies.

Taking on Day-Traders: India also increased taxes on short-term equity holders and derivative trades, reflecting how uncomfortable the government has been with the explosion in derivative trading that has taken place in India recently. In May of 2024, Reuters reported around 80% of global derivative trades were taking place in India; the notional turnover (sum of the value of the underlying assets in derivative trades) in the National Stock Exchange increased more than four-fold since May 2022 to its peak in 2024.

Thus, the capital gains on stocks held for less than one year will increase from 15% to 20%, while taxes on stocks held for more than one year will increase from 10% to 12.5%. The tax on security transactions increased from 0.0125% to 0.02%, and the tax on options has increased from 0.0625% to 0.1%, making day trading twice as costly. 

This will negatively impact short-term market sentiment while bringing more gravity to equity valuations.

Positive for credit ratings: Investors widely see India’s declining yearly fiscal deficit, which has come down every year since 2021’s 9.2% of GDP, as a crucial step in India embracing fiscal responsibility, as the country aims to improve its sovereign debt credit ratings. S&P currently gives Indian debt a BBB- rating with a stable outlook, while Moody’s puts it at Baa3 with a positive outlook.

Budget Breakdown:

• $23.9 billion (2 trillion rupees) on boosting jobs. As discussed in previous Samosa Capital editions, India faces an unusual job crisis, where despite having a low unemployment rate of around 3% (likely in of itself underreported), it has severe underemployment — low-paying peon jobs that do not require a high school diploma routinely receive applications from lawyers, doctors, and people with doctorates.

  • Unemployment was the foremost concern for young voters in the election

  • FM Sitharaman announced numerous business and job incentives to spur employment

• $7.45 billion (624 billion rupees) to projects in Modi’s key allies states

  • $5.66 billion (474 billion rupees) to expand the southern state of Andra Pradesh’s state capital, which is governed by Telugu Desam state that rose as an ally in recent elections to preserve Modi’s majority

  • $1.79 billion (150 billion rupees) in financial aid to the northern state of Bihar, governed by the Janata Dal (United) party, another ally of Modi.

• $130 billion (11.1 trillion rupees) on infrastructure, the highest expenditure, more than a three-fold increase since the 2018-2019 budget, and a significant hike from the previous year’s $110 billion (9.5 trillion).

• Defense remains the second highest expenditure, at $74 billion (6.2 trillion rupees)

• $32 billion (2.66 trillion rupees) for rural development, mostly in the form of cost-of-living subsidies

• Food subsidies, welfare, education, interest payments, and home affairs (operating railway, civil service, etc) will take up most of the remaining budget