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India's Spending, Taxation Package - Investment Industry Reactions

Editorial Staff, 9 July 2019

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Investment firms react to moves by the Indian government to strengthen the economy while the growth rate has been falling.

India’s finance minister, Nirmala Sitharaman, recently outlined a range of spending and tax measures to boost the country’s economy at a time when growth has decelerated. One of those emerging market countries often seen as having big potential – with all that implies for wealth management – the health of India is important. The budget focused on increased infrastructure spending, easing rules around foreign direct investment, improving life in rural India, and providing financial support to the banking and financial sector.

The budget put up taxes on petrol and diesel; firms with annual turnover with an annual turnover cap of 4 billion rupees now pay 25 per cent in corporate tax, versus the older threshold of R2.5 billion.

Here are comments from investment firms:

Leong Lin-Jing, fixed income investment manager, Aberdeen Standard Investments
India’s budget threw up plenty of surprises, most of which will be positive for the country and its bond and foreign exchange markets in the long term. This is a government very much taking advantage of the majority it secured at this year’s general election, wanting to push through essential structural reforms.

It aims to ramp up efforts to improve the ease of doing business and raise domestic living standards, including areas such as waste management, transport and pollution. It is even proposing to establish a social stock exchange.

The government clarified its plans to cut India’s fiscal deficit from 3.4 per cent to 3.3 per cent by increasing taxes on the super-rich, raising excise duty on fuel and import duty on gold. The latter is particularly well timed in terms of managing the balance of payments, given the recent increase in gold imports.

We need to see more details of the plans to make India’s personal tax number interchangeable with the country’s identity number system Aadhaar for tax payments and auto filing. But at first glance, this appears designed to crack down on tax evasion.

Amid falling domestic savings, there was an acknowledgement that India needs to tap nto the foreign savings pool more effectively, which would alleviate some pressure on the local bond market. Certainly India has room to venture into overseas capital markets, given its historic conservatism when it comes to external borrowing.

Plans to raise foreign investment limits for both FDI and equities will clearly help, too. However, we would urge India to exercise caution and establish clear parameters around external borrowing to ensure that it avoids the addiction to foreign capital that many emerging markets suffer from.

The institutionalisation of non-bank financial companies and the National Housing Bank under the regulatory authority of the Reserve Bank of India should give the financial system greater stability. We also anticipate further cuts to policy rates on the horizon to encourage growth, given insufficient stimulus announcements to date.

Andrey Kuznetsov, senior portfolio manager, Hermes Investment Management
The intent to issue foreign currency bonds will be welcomed by the investment community. It is also very fortunate timing for India.

Renewed dovishness of central banks globally lead to the US 10-year inside 2 per cent and close to 20-year tights. In Europe, the Germany 10-year is at an all-time low, encouraging many emerging market sovereigns to raise capital in both the dollar and the euro.

For example, in recent months Chile and Indonesia tapped into the euro market. Additionally, having a benchmark hard currency curve makes it easier for corporates in the country to tap international markets. This is one of the reasons why China decided to issue dollar-denominated bonds in recent years.

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