India’s government has allocated billions of dollars to create jobs and support regions governed by key coalition partners in a budget aimed at strengthening the coalition and regaining voter confidence following an election setback.

The budget included a higher tax on equity investments to address concerns about a potential market overheating and lower taxes for foreign companies to attract more investment.

The total outlays of $576 billion included $32 billion for rural programs, $24 billion to be spent over five years for job creation, and more than $5 billion for two states ruled by coalition partners.

“This budget prioritizes employment, skills development, small businesses, and the middle class,” Finance Minister Nirmala Sitharaman stated on Tuesday.

The government will also implement reforms across production factors, including land and labor, she added.

Sitharaman emphasized that subsequent budgets would continue to focus on these areas while presenting her seventh annual budget.

Despite increased spending, India reduced its fiscal deficit target to 4.9% of gross domestic product in the fiscal year ending on March 31, 2025, down from 5.1% in February’s interim budget. This was facilitated by a substantial surplus of $25 billion from the central bank.

The government also slightly reduced gross market borrowing to 14.01 trillion rupees.

Economists had attributed the weak poll performance, which cost Modi’s Bharatiya Janata Party (BJP) its absolute majority, to rural distress and a weak job market. They argue that land and labor reforms are crucial for India to maintain robust economic growth.

Asia’s third-largest economy expanded by 8.2% in the past fiscal year, and the government projects growth of 6.5% to 7% for the current fiscal year, according to a report released on Monday.

Sakshi Gupta, principal economist at HDFC Bank, noted that the budget effectively balanced policies supporting growth with fiscal discipline. However, Gene Fang, associate managing director for sovereign risk at Moody’s Ratings, told Reuters that implementing more ambitious reforms would be “challenging” for the coalition.

Previous attempts to streamline land acquisition and layoff procedures for companies have repeatedly encountered resistance from states concerned about potential protests sparked by such measures.

Among the initiatives aimed at boosting employment, the budget included incentives for companies to train employees and subsidized loans for higher education, Sitharaman highlighted.

India’s reported urban unemployment rate stands at 6.7%, but the private agency Centre For Monitoring Indian Economy estimates a higher rate of 8.4%.

The budget maintains spending on long-term infrastructure projects at 11.11 trillion rupees, with states receiving 1.5 trillion rupees in long-term loans to fund such expenditure. Some loans will be contingent on achieving reform milestones in areas like land and labor, which Sitharaman emphasized the government intends to push in its third term.

In a gesture towards the government’s allies, Sitharaman announced expedited loans from multilateral agencies for the eastern state of Bihar and the southern state of Andhra Pradesh.

TAX CHANGES

India increased the tax rate on equity investments held for less than a year to 20% from 15%, while the rate for those held longer than 12 months rose to 12.5% from 10%. These taxes will be applicable from Wednesday.

The government also raised the tax on equity derivative transactions that have attracted retail investors, with implementation scheduled for October 1.

Shares and the rupee declined following the budget announcement but recovered most of the losses. The main stock indexes, .NSEI and .BSESN, closed the day down approximately 0.13%.

While the tax changes posed a short-term negative for the market, Vineet Arora, investment manager at Singapore-based NAV Capital Emerging Star Fund, believes they could yield long-term benefits.

“These changes are expected to contribute to market stabilization and attract investors with a long-term perspective on the Indian economy,” Arora remarked.

The corporate tax for foreign companies was reduced to 35% from 40%, aiming to encourage more investment. Meanwhile, a lower tax burden for lower-income consumers, anticipated to stimulate spending, has propelled consumer stocks to record highs.