India's Economic Stimulus: A Two-Pronged Approach
Amid slowing economic growth, Indian Prime Minister Narendra Modi has implemented a two-pronged stimulus package involving tax cuts and interest rate reductions. However, investors remain hesitant about the adequacy of these measures.
The Reserve Bank of India's (RBI) decision to lower its benchmark interest rate for the first time in five years follows the government's announcement of substantial tax cuts in the federal budget. These actions reflect the urgency with which the government is addressing the economic slowdown.
Despite these steps, investor response has been muted. Bonds declined after the RBI announcement, while the benchmark Nifty 50 index dropped 0.2%. Economists noted that the central bank's rate cut of 25 basis points was relatively conservative. The Monetary Policy Committee maintained a "neutral" stance, indicating a lack of further rate reductions.
The budget, despite its tax cuts, has been deemed "contractionary," and the RBI's ability to cut rates further is "limited" given the Federal Reserve's pause on easing, according to Indranil Sen Gupta, an economics professor at Shiv Nadar University.
The RBI did not announce any additional liquidity measures, such as a cash reserve ratio cut or bond buyback programs, which could have provided a stronger boost to markets.
Some economists question the excessive reliance on central bank dividend payouts to finance the 1 trillion rupee tax cuts. They also express skepticism about the ability of tax cuts to significantly stimulate spending, as only a small fraction of Indian workers pay income taxes.
Nomura economists project further rate cuts by the RBI, noting that the economy faces challenges such as weak consumer sentiment and corporate profit declines.
India's growth outlook is clouded by uncertainty surrounding US President Donald Trump's policies and the potential for global trade disruptions. To mitigate these risks, the government has implemented preemptive measures, including tariff reductions and the acceptance of undocumented migrants from the US.
However, Chief Economic Adviser V. Anantha Nageswaran remains optimistic, stating that India should "aspire" to a long-term growth rate of 7%, with 6.7% growth expected in the coming fiscal year.
Economists from Standard Chartered acknowledge that growth could decline further this year, but believe that the government's recent actions have "set a floor for growth" amidst global uncertainties.