PANAJI, India – 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 organised 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, aerospace company Lockheed Martin Mastercard and the world’s biggest retailer Walmart.

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.

“The move will make Indian companies globally competitive, and allow global companies a good option for growing their manufacturing base in-country,” said Mukesh Aghi, president of the US-India Strategic Partnership Forum.

‘VERY BOLD’

Finance Minister Nirmala Sitharaman said India’s effective corporate tax rate would be lowered to about 25%.

She said that would put India on a par with Asian peers and the rate would be as low as 22% if companies did not seek any other special tax incentives.

Any manufacturing companies incorporated on or after Oct. 1 would be eligible for a 17% tax rate, with the condition that they start production by March 2023, said Sitharaman, speaking from the coastal state of Goa.

Officials meeting in Goa are also considering lowering sales taxes on 20-25 products in a bid to address a slump in consumer demand that slowed economic growth to a 25-quarter low of 5% in the April-June quarter.

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 Nifty and the benchmark BSE Sensex closed 5.3% higher. The rupee rose as much as 0.9% to 70.68 against the dollar, its strongest since Aug. 9.

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.

Reuters

Sep 20, 2019

Additional reporting by Delhi, Mumbai and Bengaluru newsrooms; writing by Aftab Ahmed; editing by Sanjeev Miglani, Euan Rocha, Timothy Heritage and David ClarkeOur Standards:The Thomson Reuters Trust Principles.