India’s Finance Minister Nirmala Sitharaman announced on September 20 that the corporate tax rate would be lowered to 22 percent from 30 percent. It is hoped the $20.5bn stimulus package will spur private investment and help bring India out of a six-year low in economic growth.
The markets responded positively to the news. After the announcement was made, the country’s Sensex index leapt up by 4.5 percent.
The 22 percent corporate tax rate applies to companies that do not receive incentives or exemptions. For those that do, the corporate tax rate will be lowered to 25 percent down from 35 percent, while some new manufacturing firms will see their corporate tax rate cut to 15 percent from 25 percent.
India could be in prime position to attract more investment from companies that are trying to avoid supply chain disruptions caused by the US-China trade war
Unemployment in India is currently at a 45-year high and discontent has been rising in the country, particularly in rural areas. So far, the central bank has cut interest rates four times this year.
The cut will lose the economy $20.5bn in tax revenue and has raised concerns that Prime Minister Narendra Modi’s government may struggle to meet its fiscal deficit target of 3.3 percent for the year. However, the move is considered a much-needed boost to the economy. Bond yields in India rose to an almost three-month high as speculation mounted that the government may need to borrow more if it’s to meets its targets for 2019-20.
When Modi first came to power in 2014, investors welcomed an administration they thought would bring a wave of pro-business reforms to the economy. Many now feel that Modi has failed to live up to expectations. At the start of 2019, India was the world’s sixth-largest economy; it has since fallen to seventh place.
With the new corporate tax rate cut, Modi may be able to make amends with businesses and investors. According to Sitharaman, the rate cut will put India on an equal footing with its Asian peers. This means India could be in a prime position to attract more investment from companies as they try to avoid supply chain disruptions caused by the US-China trade war.