An all-out push to revive its sputtering economy is not within India’s reach. Instead of spending meager local resources to rebuild faltering demand, New Delhi is betting that world growth this year will be down in the dumps — and that will make India appear attractive to foreigners even when it really isn’t.
The budget unveiled by Prime Minister Narendra Modi’s government Saturday left virtually every domestic constituency unhappy. My interpretation? Luring overseas investors to high-yielding Indian assets amid a global coronavirus scare is the preferred strategy.
Under this blueprint, sovereign wealth funds such as Singapore’s GIC Pte and Abu Dhabi Investment Authority will pay no taxes on what they earn from Indian infrastructure investment made before 2024, even though domestic investors were miffed the budget didn’t scrap their long-term capital gains tax.
Financiers in Mumbai are upset that the budget did little to clear the jammed arteries of credit. But yield-starved overseas investors will get full access to parts of the rupee-denominated Indian government bond market, where 10-year yields are a juicy 6.6%. The overseas participation ceiling on corporate bonds, currently limited to 9%, will rise to 15%. A Saudi Aramco-style initial public offering of the Life Insurance Corp., a state-owned former monopoly with $434 billion in assets, would add to Wall Street banks’ bragging rights.
The locals will have to sacrifice, though. Funding has been cut for a rural job guarantee program even as widespread agrarian distress weighs on demand for everything from toothpaste to biscuits. The urban middle class got thrown a carrot of lower tax rates, but it’s only for those who give up existing exemptions. Most people won’t. Dividend earners will, in fact, pay higher taxes as well as a levy — albeit one they can offset against their tax bill — on sending money overseas for education or holidays.
Except for a renewed commitment to affordable housing, Modi’s government provided little demand stimulus. Existing bottlenecks remain, including a large overhang of unfinished homes. A bold rescue of troubled shadow banks, which are clogging up credit, isn’t in the cards. The planned 10.85 trillion rupees ($152 billion) of capital expenditure is expected to grow by just 2.4%.
Break it down, and the 6.73 trillion rupee outlay of public-sector companies will shrink by 5%. The remaining 4.12 trillion rupees of capital spending funded out of budgetary resources will grow, but 5% of it will go to propping up dying state-run telecom companies. With the private sector refusing to invest, such poor-quality public expenditure won’t pull up growth in nominal gross domestic product — which is what matters for tax collections — to the targeted 10% rate, from a four-decade low of 7.5% in the fiscal year that ends March 31.
India’s fiscal situation is parlous. I have previously argued that the country should attract patient capital from developed countries, because its domestic balance sheets — financial, corporate, government and households — are simultaneously stretched. Meanwhile, global pension and sovereign funds are staring at chronically low interest rates, a problem that could worsen if the coronavirus plays havoc with growth in an over-leveraged world.
To attract some of this money to a highway or a grid-connected solar farm is tactically sound. So is the plan to seek India’s inclusion in global bond indexes. However, an honest embrace of global capital this isn’t. That would have meant reversing a 2012 weaponization of tax laws to hound investors like Vodafone Group Plc, and Cairn Energy Plc. Vodafone’s entire investment in India is now worthless because of the state’s overreach. Amazon.com Inc. is being snubbed because people in Modi’s administration don’t like what what the Jeff Bezos-owned Washington Post is saying about it.
Yet the government’s bargain with its own 1.3 billion people is far from fair. Desperate job seekers, firms and farmers are all paying a price for the fiscal deficit, which is closer to 5% than the 3.8% New Delhi is acknowledging for this year and a far cry from the 3.5% projected for next. The fudge comes at a cost: With the government cornering household savings, the cost of capital can’t fall, even with the central bank furiously cutting its policy rate and buying longer-dated bonds.
Inconvenient truths about the deficit could jeopardize India’s fragile investment-grade rating. Foreigners will stop coming. Showing them love in the time of coronavirus may be the only idea India has right now. But ultimately it’s Indians who will have to believe in a pro-growth message to generate a return for themselves as well as for global capital. It’s this link of trust that’s missing. -Bloomberg