India budget makes bet on manufacturing; transaction tax hike spooks markets

[NEW DELHI] India made a fresh bet on its manufacturing sector in its annual budget, but the Narendra Modi-led government’s reform plans fell short of expectations as the global economic order undergoes profound changes wrought by the Trump administration.

The absence of ambitious reforms and an increase in the transaction tax on derivatives spooked equity markets which fell 1 per cent in a special trading session for Sunday’s (Feb 1) budget proposals.

The Indian economy has remained 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. But foreign investors have sold a record amount of Indian equities, with sales adding up to US$22 billion since last January, and the rupee has weakened sharply to all-time lows.

The government will look to strengthen the country’s manufacturing sector, Finance Minister Nirmala Sitharaman said in her budget speech, as she laid out priorities for Asia’s third-biggest economy and pledged to accelerate growth amid a volatile global environment.

It will also continue to focus on strengthening government finances, by bringing down the federal government debt-to-GDP ratio to 55.6 per cent in the next financial year from 56.1 per cent and the fiscal deficit to 4.3 per cent from 4.4 per cent in the current year.

It will borrow 17.2 trillion Indian rupees (S$238.2 billion) from the bond markets, which have seen yields rise due to high government borrowings.

“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 (STT), the rise has come as a negative surprise,” he said.

The STT was hiked by more than 50 per cent on futures trading to 0.05 per cent from 0.02 per cent and to 0.15 per cent from 0.01 per cent on options.

SEE ALSO

India expects up to 7.2% growth in upbeat outlook

India’s textile exporters pin hopes on EU deal after US tariff blow

India’s benchmark equity index, the Nifty 50 was down about 1 per cent with stocks falling across the board including banks, infrastructure, defence and capital markets.

Nifty’s index of capital market stocks was down about 6 per cent following the announcement.

Indian bond and forex markets were closed on Sunday.

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

India is also striking deals such as a landmark trade agreement with the European Union to offset the hit from the tariffs Trump has imposed.

The government will prioritise scaling up manufacturing across seven sectors, Sitharaman said. They include 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 been struggling to raise manufacturing from the current level of under 20 per cent of GDP to 25 per cent to generate jobs for the millions entering the nation’s workforce each year.

To spur private investment and demand, New Delhi has rolled out a series of reforms in recent months, including consumption and income tax cuts, overhaul of labour laws and steps to open up the tightly controlled 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,” Modi said on Thursday before the government’s economic survey forecast growth of between 6.8 per cent and 7.2 per cent for the fiscal year starting in April.

India will continue with “next-generation reforms”, as the next 25 years will be key to meeting the goal of making the South Asian nation a developed economy, he said.

The government will set up a high-level committee to review rules for the country’s financial sector and announced steps to boost the corporate bond markets.

To keep economic growth strong, the government will also spend 12.2 trillion Indian rupees on infrastructure in the new year, compared to 11.2 trillion rupees last year.

Defence spending was raised by a modest 6 per cent.

“Overall, this is a budget without fireworks – not a big positive, not a big negative,” said Aishvarya Dadheech, founder and chief investment officer at Mumbai-based Fident Asset Management. REUTERS