India Cuts Corporate Taxes To Boost Manufacturing And Revive Growth

FILE PHOTO: India's Finance Minister Nirmala Sitharaman and the Reserve Bank of India (RBI) Governor Shaktikanta Das arrive to attend the RBI's central board meeting in New Delhi on July 8, 2019

India cut corporate tax rates on Friday in a surprise move designed to woo manufacturers, revive private investment and lift growth from a six-year low that has led to major job losses and fueled discontent in the countryside.

Prime Minister Narendra Modi, under pressure to make good on a promise to deliver growth and tens of thousands of jobs, said the lower tax rates would spur new investment and drive his “Make In India” plan to boost domestic manufacturing.

“The step to cut corporate tax is historic. It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win-win for 1.3 billion Indians,” Modi said on Twitter.

The cut in the headline corporate tax rate to 22% from 30% was widely cheered by Indian equity markets. The benchmark index posted its biggest intraday gain in more than a decade to end more than 5% higher.

“The measures announced by the finance minister this morning can be described as a ‘New Deal’ for the Indian economy,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. “The psychological stimulus from this … will be higher than the fiscal stimulus.”

Modi is headed to the United States this weekend where he will showcase India as an attractive destination for investment at a rally organized by Indian-Americans which U.S. President Donald Trump is set to attend.

Modi is also due to discuss investment opportunities with executives from U.S. bank JPMorgan Chase (JPM.N), aerospace company Lockheed Martin (LMT.N), Mastercard (MA.N) and the world’s biggest retailer Walmart (WMT.N).

The new corporate tax rate for domestic companies, excluding surcharges, makes India more competitive than neighbouring Bangladesh and puts it almost on par with Vietnam and Thailand, countries that have wooed businesses affected by the U.S.-China trade dispute.

Foreign firms that have Indian subsidiaries or joint ventures with Indian companies would also enjoy the lower corporate tax rates, Sitharaman said.

Reserve Bank of India Governor Shaktikanta Das said the moves augur “extremely well” for the economy.

“These are definitely very bold and welcome measures,” he said at a forum. “These tax rates take us closer to the tax rates which prevail in this part of the world.”

The broad NSE index .NSEI and the benchmark BSE index .BSESN closed 5.3% higher. The rupee INR=D4 rose as much as 0.9% to 70.68 against the dollar, its strongest since Aug. 9.

Separately, India’s goods and services tax (GST) council made tweaks to taxes on Friday, but avoided slashing taxes on automobiles despite lobbying by industry executives in one of the industry’s worst downturns.

Auto sector executives on Friday welcomed Sitharaman’s move to cut the corporate tax, saying the move would boost investment. Indian auto sales fell for the 10th straight month in August, leading to hundreds of thousands of job losses.

The council hiked the surcharge on caffeinated beverages to 28% from 18%, which could make coffee made at Starbucks Corp (SBUX.O) and Coffee Day Enterprises (CODE.NS) more expensive.

It also cut taxes on marine fuels, cut and semi-polished precious gem stones, and on outdoor catering to boost growth in tourism.

YIELDS SPIKE

While shares soared, bond yields spiked to a near three-month high on speculation the government may have to borrow more to meet its spending needs, because the measures will cut revenue by 1.45 trillion rupees ($20.4 billion) in the current fiscal year, according to government estimates.

The risk India will miss its fiscal deficit target of 3.3% has increased significantly as tax revenue growth is already weak, ratings agencies and economists said.

“In view of India’s already high general government fiscal deficits, we see this as a credit negative development,” said Andrew Wood, director of sovereign and international public finance ratings at S&P Global Ratings. Moody’s Investors Service said tax cuts were credit positive for Indian firms.

The 10-year benchmark bond yield rose to 6.84% from 6.57% before the finance minister’s announcements.

“On one side is the reality that 1.45 trillion rupees is sacrificed. On the other side is the hope that it will be recovered through economic recovery,” said Mahendra Jajoo, head of fixed income at Mirae Asset Global Investments in India.

Some analysts however, remain doubtful the new measures will drive consumer spending, which has taken a hit.

“I am not sure how lower tax rates would incentivise companies to increase capex, when the private consumption engine has lost steam,” said Rupa Rege Nitsure, chief economist at L&T Financial Services.