Executives should evaluate how potential changes to taxes and duties could impact their businesses
India’s newly elected government released a finalized union budget for FY 2024–25 on July 23. While the updated budget was clearly influenced by the recent election outcome, with large transfers to key coalition partners’ states and new incentives to boost employment, its broad brushstrokes were well in line with the interim budget released before the election.
Business implications:
Overall, the updated budget offers continuity and should help address concerns about sharp turns in India’s trajectory under its new coalition government. APAC VPs and India GMs facing questions from corporate about what coalition rule will mean for India’s governance can point to this outcome to allay concerns (though they should be careful about playing it up too much, as the honeymoon may yet come to an end).
Multinationals across industries should evaluate how they can best capitalize on the government’s proposed tax cut for foreign companies and employment-linked incentive programs. The former has the potential to free up money in multinationals’ P&Ls, improve their competitive positioning, and change calculations in investment cases. And the latter has the potential to cut personnel expansion costs, particularly for manufacturers, and reduce the cost of internship programs to feed talent pipelines.
B2C companies should expect to see some improvement in mass market consumption due to the government’s proposed income tax cuts (which leaders estimate will save salaried workers up to 17,500 INR (209 USD) per year) as well as its new employment-linked incentive programs. However, in both cases, companies should be conservative in their expectations, as neither change is likely to dramatically improve middle-income households’ prospects in the short term.
B2B companies should review the government’s proposed changes to customs duties, which span a range of key inputs, including cell phones and components, critical minerals, and precious metals. These shifts have the potential to impact COGS across the value chain (i.e., costs for individual companies, their customers, and their vendors). Companies selling into transport infrastructure projects should also expect funding to continue under the new administration, with substantial capital flowing to the states of Andhra Pradesh and Bihar.
B2G companies should consider exploring opportunities in Andhra Pradesh and Bihar specifically. Not only did these states just secure a massive capital infusion, but they are also likely to see continued funding in the years ahead. The greatest concentration of these funds is likely to focus on developing a new capital city for Andhra Pradesh.
Key details from the FY 2024–25 union budget:
Spending rose relative to the interim budget, but changes were targeted and controlled. Transfers from the national government to the states of key BJP allies rose substantially (see below for details), and spending allocations for agriculture, pensions, and urban development were also adjusted upward. In contrast, spending allocations for energy, finance, health, and interest were all adjusted downward. Overall, expenditures were only slated to rise 1.1% relative to the original plan.
The government is shifting its focus towards employment. The Modi administration plans to roll out a series of programs to boost employment and upskill workers. Among these, three stand out. The first is an initiative to incentivize manufacturing companies to bulk hire first-time workers. The second is a program that will offer companies reimbursement for a portion of selected new hires’ social security contributions. And the third is a subsidized internship program focusing on the top companies in India.
The budget proposes a series of changes to the tax code. The government is proposing a series of immediate changes to both direct and indirect taxes. To attract more foreign capital, it has proposed reducing the corporate tax on foreign companies from 40% to 35%. And to ease some pressure on salaried workers and pensioners, leaders have proposed raising standard deduction levels and revising rates and bands for personal income taxes. The government has also proposed a series of changes to customs duties and intends to undertake a comprehensive review of the rate structure over the next six months with the goal of rationalization and simplification.
The government kept its fiscal deficit under control, but not as much as headlines suggest. Leaders trumpeted a decline in the fiscal deficit from 5.1% to 4.9% of GDP in the updated budget. However, this was not due to lower spending. Instead, it was largely due to a one-time dividend from the central bank that was twice as large as expected. Without that transfer, the deficit would have risen to 5.3% of GDP. While this represents a decline from last year’s level of 5.6%, the government has a long way to go to hit the 4.5% goal it set for next year. Leaders have already laid the groundwork to begin moving away from this target, so there is a distinct possibility that it will be scrapped.
The BJP didn’t sacrifice its priorities. The budget allocations for transportation infrastructure and key production-linked incentive programs remained intact in the final budget. Spending on transport was consistent across the interim and final budgets, and expected outlays remained stable for a range of major schemes focused on automobiles and auto components, displays, EVs, food processing, large-scale electronics, IT hardware, pharmaceuticals, and semiconductors.
The BJP’s largest coalition partners extracted concessions but did not get everything they wanted. The updated budget included major outlays to Andhra Pradesh and Bihar, the home states of Telugu Desam and Janata Dal (United), respectively. Both received billions of dollars for a range of projects, but they were not given all the money they reportedly asked for, nor were they afforded “special-category status”, which would have given them substantial long-term financial benefits. This suggests that the main partners in the National Democratic Alliance were able to compromise and bodes well for India’s coalition governance.
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