From factories to fiscal discipline: What India’s Budget signals for growth

INDIA made a renewed bet on its manufacturing sector in its annual budget, but the Narendra Modi-led government’s reform agenda fell short of market expectations, triggering a sharp sell-off in equities following an increase in transaction taxes on derivatives.

Presenting the budget, Finance Minister Nirmala Sitharaman said the government would prioritise strengthening manufacturing as it seeks to accelerate and sustain growth in Asia’s third-largest economy amid a volatile global environment.

However, equity markets reacted negatively to the proposals. Stocks fell about 1 per cent in a special trading session held on Sunday to reflect the budget announcements, as investors were spooked by the absence of major reform measures and a sharp hike in the Securities Transaction Tax (STT).

The Indian economy remains one of the fastest-growing major economies, with gross domestic product growth expected at 7.4 per cent in the financial year ending March 31, 2026. Despite this, foreign investors have sold a record amount of Indian equities, with outflows totalling $22 billion since last January, while the rupee has weakened to record lows.

In her budget speech, Sitharaman said the government would also continue to strengthen public finances. The federal government’s debt-to-GDP ratio is projected to decline to 55.6 per cent in the next financial year from 56.1 per cent, while the fiscal deficit is expected to narrow to 4.3 per cent from 4.4 per cent in the current year.

The government plans to borrow 17.2 trillion Indian rupees from the bond markets, where yields have risen amid concerns over high government borrowing.

“The government has delivered a non-adventurous budget,” said Dhiraj Nim, economist at ANZ in Mumbai. “It is the kind of budget that will likely keep the bond markets nervous as the pace of fiscal consolidation is slower than expected. While equity market participants were expecting a reduction in the Securities Transaction Tax, the rise has come as a negative surprise,” he said.

Under the proposals, the STT on futures trading was increased by more than 50 per cent to 0.05 per cent from 0.02 per cent, while the tax on options trading was raised to 0.15 per cent from 0.01 per cent.

India’s benchmark equity index, the Nifty 50, was down about 1 per cent, with losses spread across banking, infrastructure, defence and capital market stocks. The Nifty index of capital market stocks fell about 6 per cent following the announcement. Indian bond and foreign exchange markets were closed on Sunday.

Manufacturing focus amid global pressure

India’s economy has so far weathered punitive tariffs imposed by US President Donald Trump, with growth supported by government spending on infrastructure and earlier income and consumption tax cuts that boosted consumer demand.

India is also pursuing trade agreements, including a landmark deal with the European Union, to offset the impact of tariffs imposed by the United States.

Sitharaman said the government would prioritise scaling up manufacturing across seven sectors: pharmaceuticals, semiconductors, rare-earth magnets, chemicals, capital goods, textiles and sports goods. A review of 200 legacy industrial clusters will also be conducted.

The Modi government has struggled to raise manufacturing’s share of the economy from under 20 per cent of GDP to 25 per cent, a level seen as necessary to create jobs for the millions entering India’s workforce each year.

To spur private investment and demand, the government has rolled out a series of reforms in recent months, including consumption and income tax cuts, an overhaul of labour laws and steps to open up the tightly regulated nuclear power sector.

“The nation is moving away from long-term problems to tread the path of long-term solutions. Long term solutions provide predictability that fosters trust in the world,” Prime Minister Narendra Modi said on Thursday, ahead of the government’s economic survey, which forecast growth of between 6.8 per cent and 7.2 per cent for the fiscal year beginning in April.

Modi said India would continue with “next-generation reforms”, adding that the next 25 years would be critical to achieving the goal of making the country a developed economy.

The government also announced plans to set up a high-level committee to review regulations governing the financial sector and outlined measures to boost the corporate bond market.

Modest rise in spending

To support economic growth, the government will increase infrastructure spending to 12.2 trillion Indian rupees ($133.08 billion) in the coming year, compared with 11.2 trillion rupees in the previous year.

Defence spending was raised by a modest 6 per cent.

(With inputs from agencies)