BREAKINGVIEWS-India's budget packages desperation as reform

By Shritama Bose

MUMBAI, Feb 2 (Reuters Breakingviews) - Prime Minister Narendra Modi's government is trying to pitch its latest federal budget as a way to boost foreign direct investment. Yet the changes unveiled on Sunday are piecemeal at best, exposing how the administration of the world's fifth-largest economy has virtually no fiscal wiggle room.

Granted, the measures Finance Minister Nirmala Sitharaman has proposed will be selectively useful. Offshore firms like Alphabet's GOOGL.O Google that use India-based data centres will enjoy a 20-year tax holiday and their related entities offering the service get a safe harbour of up to 15% on cost, with tax perks also being extended to India-based hubs of global firms.

Sitharaman is courting India's diaspora too – a common budgetary trick. She is proposing to allow non-resident Indians to own up to 10% of public companies, twice the level currently permitted. The aggregate permissible holding for this category of investors will also rise to 24% of a company from 10%.

Trouble is, neither policy offers broad economic benefits. Some of the tax breaks for data centres and such seem targeted at minimising roadblocks to inflows rather than massively stimulating moribund net FDI. And while reducing limits on diaspora ownership of domestic companies is philosophically the right thing to do, there's little to suggest that overseas Indians are feeling restricted: their holdings were nearing the current cap in only 30 firms listed on local exchanges as of September.

Lowering taxes on capital gains from asset sales would have been a better choice for boosting confidence at a time when a weak rupee and lacklustre company earnings are spooking offshore investors. India taxes capital gains at up to 35%, higher than the 25% rate China charges.

Moreover, other measures in the budget are likely to keep investors on edge rather than attract capital. New Delhi plans, for example, to borrow 17.2 trillion rupees ($187.75 billion) in the next financial year. That pushed the yield on the benchmark sovereign bond up to 6.78% in Monday's trade, its highest level since March 2025. A proposal to increase the levy on derivatives transactions, while aimed at curbing retail trading, hurt sentiment in Indian equities, which ended 2% lower on Sunday.

But those are necessary evils for an administration saddled with much of the heavy lifting for growth: private companies' contribution to asset creation fell to its lowest in a decade in the year ended March 2024. Sitharaman plans to increase government capital spending by 9%, faster than output, next year. With such growing demands on the public purse, it's little wonder the budget tries to package desperation as real reform.

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CONTEXT NEWS

India will aim to reduce its debt-to-GDP ratio to 55.6% in the financial year to March 31, 2027 from 56.1% in the current year, Finance Minister Nirmala Sitharaman said on February 1 while laying out the government budget for 2026-27. New Delhi will target lowering the fiscal deficit to 4.3% of GDP in the next financial year from 4.4% in 2025-26.

Sitharaman also said that foreign companies that provide cloud services to global clients using services from India-based data centres will be exempted from paying tax until 2047. A safe harbour of 15% of the cost will apply in cases where the data centre provider is a related entity.

The budget proposed allowing non-resident Indians to own up to 10% of listed companies, up from the current limit of 5%. Non-residents as a category will be allowed an aggregate holding of up to 24% in a company, as against 10% currently.