New Delhi: India rolled back an additional levy on foreign funds and announced other measures to boost economic growth.
The enhanced surcharge on long and short-term capital gains has been withdrawn, Finance Minister Nirmala Sitharaman said in New Delhi Friday. She also announced an immediate infusion of Rs 700 billion set aside in the budget last month to boost capital of banks.
“The enhanced surcharge on FPI goes, in simple words,” Sitharaman said, referring to a budget proposal pertaining to Foreign Portfolio Investors. “In other words, the pre-budget position is restored.”
The measures come after the government was criticised for failing to stem a rout in local equity markets and a slowdown in demand that has impacted industries ranging from automobiles to items of daily use like biscuits and hair oil. The withdrawal of the additional levy on Foreign Portfolio Investors should boost sentiment after overseas funds withdrew more than $3 billion since the measure was announce in July.
Other measures such as bank capitalisation and government’s purchase of new vehicles will aid economic growth.
“The measures to boost demand, particularly in the auto sector will be positive for growth,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. “Higher government spending, and the release of payments by the government will also support business.”
The finance ministry had proposed increasing the effective tax rate on individuals with taxable annual income of above Rs 20 million ($283,000) by about 3%, and for those earning above Rs 50 million by 7%. Foreign Portfolio Investors became an unintended target of the move.
The tax proposal, along with a lack of measures to boost the economy in the July 5 budget, led to foreigners withdrawing more than $3 billion from Indian shares, putting pressure on stocks and the rupee.
Financial markets cheered the move to withdraw the levy, first shared by a government official earlier Friday. The S&P BSE Sensex, India’s key equity index, erased declines and closed 0.6% higher. Rupee reversed losses to advance as much as 0.2%.
The move to frontload capital injections for state-run banks will help spur fresh loans, she said, adding that banks will also pass on all rate cuts to borrowers. In order to improve transmission of central bank’s rate cuts, the minister announced lender will benchmark their loan products to the Reserve Bank of India’s benchmark rate.
These steps are key to achieving the goal of encouraging lending to allow companies to invest and boost growth.
While the RBI has cut rates by a total 110 basis points since February, the pass through has been less than desirable for Governor Shaktikanta Das, who’s sought help from all stakeholders to boost growth.
Data due next week will probably show India’s gross domestic product expanded 5.6% in the quarter ended June, slower than the 5.8% pace seen in the previous three months.
Weakening growth numbers won’t come as a surprise. Consumer spending on everything from hair oil to cookies have waned as concerns about job losses grow, amid automobile makers shuttering factories temporarily to manage piling inventories. A shadow-banking crisis has also weighed on private consumption, which accounts for almost 60% of the gross domestic product.
“Reforms is a continuous process and the momentum of reforms will continue,” Sitharaman said.
Here’s more from Sitharaman’s briefing:
- Government will provide total cash support of 300 billion rupees to home-finance companies in some relief to shadow lenders
- Tax refunds to be expedited
- Startups get relief: angel tax provisions will not be applicable on them and their investors
- Government departments to “go buy vehicles” to replace old cars in boost for automobiles sector
— With assistance from Ronojoy Mazumdar, Ameya Karve, Vrishti Beniwal and Devidutta Tripathy. (Bloomberg)