India’s Trump-Style Tax Cut Won’t Fix the Economy

Indian Prime Minister

Narendra Modi

and President Trump took to the stage together in Texas on Sunday. At home, Mr. Modi’s finance ministry is taking a leaf out of the Trump playbook with a headline-grabbing tax cut for companies. The move could goose the Indian equity market, but won’t begin to remedy what ails the broader economy.

India taxes companies far too highly. At 48.3%, its total corporate income-tax rate was the highest among 74 countries ranked by the Organization for Economic Cooperation and Development in 2018.

The Indian government on Friday proposed reducing the headline corporate tax rate to 22% from 30%, effective from the start of the current tax year in April. The cut is likely to boost the earnings growth of companies in the MSCI India index by around 6 percentage points this calendar year and next, according to Goldman Sachs analysts. The sectors that will benefit the most are raw materials, financials and industrials, which currently have the highest effective tax rates. Foreign funds have pared down their holdings of Indian shares since 2014-15, when a burst of optimism about reform drove portfolio managers into the country’s stock market. The tax cut provides an opportunity for them to rebuild their allocations, but caution is warranted. Indian stocks aren’t cheap. Even before rising around 8% on Friday and Monday, the country’s equities fetched more than 18 times expected earnings over the next year, expensive by historical standards. And the upside for the broader economy is more limited than it is for corporate earnings. Growth slipped to just 5% in the last quarter compared with a year earlier, the lowest of Mr. Modi’s tenure. The country’s expansion has been squeezed by a successful crackdown on nonbank financing and an uncomfortably large pile of bad debts. Attempts to make land easier to acquire, and staff to hire and fire, have proved unpopular and hit roadblocks. The implementation of a nationwide Goods and Services Tax to replace a web of varied state-level charges was beset by glitches. Amid such problems, the government seems to have lost what zeal it had for the kind of big-ticket reforms needed to unlock India’s growth potential in the longer term. The finance ministry last week asked banks not to designate loans to micro- to medium-size businesses as nonperforming assets, even when they have been in arrears for 90 days, until March 2020. The country’s nonperforming loan ratio has dipped from its 2018 high of almost 11%, but at around 9%, it remains too high for comfort. Banks were also asked to organize loan melas—public gatherings between customers and banks to encourage more lending. There is no point in India cracking down on shadow banking only to encourage regular banks to rack up problem loans. Investors should enjoy the tax cut. But without fresh reform impetus, and paired with some uncomfortable signs of backpedaling on private-sector debt, it won’t shift the needle very far when it comes to India’s growth trajectory. Write to Mike Bird at

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