India’s “Trump” Card: Tax Cuts

The International Monetary Fund (IMF) has been predicting India to grow solidly above 7% for the foreseeable future. Despite some recent transient weakness, we think India is very well positioned to continue its impressive growth.

Several recent measures to boost the economy point to a political willingness to support India’s growth. After an unprecedented rate cut, India’s government, in a big boost to “India Inc.,” just announced corporate tax cuts of 8% to 15%.1 My analysis below breaks down what this tax cut means for different sectors and how investorsmight benefit.

Scale of Tax Cuts and the Reasoning Behind Them

On September 20, the finance minister of India announced an unprecedented cut in corporate taxes, bringing them down from 35% to 25% in most cases and from 30% to 22% in some cases.1 With an approximate total tax revenue of around $100 billion, that’s a drop in government revenue of about $20.5 billion.

Corporate Taxes

corp taxrate

 Reason 1: Domestic Growth

This step reflects policy making in India that responds fast to changing domestic and international environments. Back-to-back reforms that were focused on streamlining taxes caused stress for manufacturers and distributors, and weakening credit growth has affected consumer spending. This has been reflected in weakening sales of automobiles and consumer goods. Thus, it was necessary for government to provide a fiscal boost in addition to the monetary boost provided by the Reserve Bank of India (RBI) in August.

Reason 2: Trade Competitiveness

Beyond domestic reasons, the tax cut? was made to help incentivize global manufacturing companies to hedge against the effects of the volatile U.S.-China trade dispute. Early this year, Apple2 announced that it was shifting some of its manufacturing from China to India, and other companies are also shopping around.

The figure below shows that over the last two decades India has had higher tax rates when compared with China, Malaysia, Vietnam, Thailand and other potential manufacturing hubs in Asia. This put India at a relative disadvantage for companies that were considering moving out of China because of the recent U.S.-China trade war. Thus, current cuts by India are much welcome and, in my opinion, aimed at giving companies an incentive to move to India.

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