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Modi's government just presented India's new budget. Here are the highlights

Lisa Micheal 26 Jul 4
Women plant rice saplings at a paddy field at Baghmara village in Baksa district of Assam, India.

India's newly appointed finance minister, Nirmala Sitharaman, presented the country's full-year budget Friday.

It comes on the heels of the country's recent parliamentary elections which saw Prime Minister Narendra Modi win a decisive victory.

The budget will cover the remainder of the fiscal year that started April 1, 2019 and will run until March 31, 2020.

"We need to invest heavily in infrastructure, in digital economy and on job creation in small and medium firms," Sitharaman told the Parliament during her budget speech. She said India is set to become a $3 trillion economy in the current financial year and it will be "well within our capacity to reach $5 trillion in the next few years."

Friday's budget focused on increased infrastructure spending, easing rules around foreign direct investment, improving livability in rural India, and providing financial support to the banking and financial sector, among other measures.

The measures are aimed to counter the recent slowdown in the Indian economy. Between January and March, annual growth declined to 5.8% — the slowest pace in 20 quarters. For the fiscal year that ended in March, the economy expanded at a five-year-low of 6.8%.

Several high frequency indicators — such as industrial output data and auto sales numbers — have suggested the slowdown could be more severe than previously predicted. Making matters worse, unemployment is at a 45-year high.

Sitharaman also said the government will reduce its fiscal deficit target for the current financial year from 3.4% to 3.3%.

Some of the measures announced Friday include:

  • India will comprehensively restructure its national highway building program to ensure enough capacity is created.
  • Railway infrastructure will need an investment of 50 trillion rupees (about $73 billion) between 2018 and 2030.
  • The country will enter the aircraft financing and leasing business for self-reliance and to create jobs.
  • Sitharaman proposed making available a blueprint this year for developing gas grids, water grids, information highways and regional airports.
Farmers and rural economy
  • The government's plan is to ensure every willing rural family in India will have access to electricity and clean cooking facility by 2022.
  • India plans to invest widely in agricultural infrastructure and to support private entrepreneurship that adds value to farm produce.
  • Sitharaman said the plan is to form about 10,000 new Farmer Producer Organizations — or co-operatives that band together to produce and harvest crops. Those organizations will help ensure farmers enjoy economies of scale over the next five years.
  • Under an existing scheme, the government plans to upgrade about 125,000 kilometers of road connecting rural areas over the next five years at an estimated cost of 802.5 billion rupees.
  • Farmers were the big winners in the interim budget in February: The government allocated 600 billion rupees ($8.75 billion) for a rural jobs program and 190 billion rupees for building roads in the countryside.
  • Petrol and diesel will become more expensive and the government proposed to increase customs duty on gold and other precious metals from 10% to 12.5%. 
  • Companies with annual turnover limit of 4 billion rupees will now pay 25% in corporate tax — the threshold was raised from a previous turnover limit of 2.5 billion.
  • There were no changes announced in the personal income tax rates.
  • Sitharaman said direct tax revenue increased by 78% from the fiscal year 2014 when Modi first came to power.
  • Still, according to the latest economic survey released on Thursday, overall revenue collected from taxes fell short of estimates during the last fiscal year, which ended in March 2019.
  • The report showed that while direct taxes grew by 13.4% due to an improvement in corporate tax collection, indirect levies fell short by about 16% due to a decline in Goods and Services Tax (GST) revenues.
Small and medium-sized enterprises
  • The government has allocated 3.5 billion rupees for the financial year for 2% interest subvention for all GST registered micro, small and medium-sized enterprises (MSME) on fresh or incremental loans.
  • Interest subvention is basically a subsidy offered on interest rates borrowers have to pay.
  • A platform will also be created for the MSMEs on which they can file bills and make payments in a timely manner.
Foreign Direct Investment
  • Foreign direct investments will be further opened up in sectors like aviation, media, insurance and animation
  • Local sourcing restrictions will be eased for foreign direct investments in single-brand retail sector — that could potentially benefit manufacturers like Apple or Xiaomi.
  • Government proposed to provide 700 billion rupees in capital for public sector banks to boost credit.
  • Sitharaman said that bad debts held by commercial banks reduced by over 1 trillion rupees last year and 4 trillion rupees were recovered due to India's bankruptcy laws.
  • The fiscal deficit target was reduced from 3.4% of GDP to 3.3% for the current financial year.
  • The government will start borrowing some funds from the external markets in foreign currencies.
  • India allocated 4 billion rupees for the year to build world-class higher education institutions.
  • The government also plans to start a program called "Study in India" to bring more foreign students to local colleges and universities.
  • Sitharaman also proposed to establish a National Research Foundation (NRF) that will fund, coordinate and promote research in India.
  • NRF will assimilate research grants given out by various ministries and ensure the overall research environment is strengthened.
  • There will also be a new National Education Policy to transform the country's higher education system.

Reuters contributed to this report.