India ramps up stimulus to spur faltering economy

By Dan Strumpf and Anup Roy

Prime Minister Narendra Modi is counting on a two-pronged stimulus of tax and interest rate cuts to turn around India’s slowing economy, but investors may need more convincing that the measures will be enough.

The decision by India’s central bank on Friday to reduce its key rate for the first time in five years comes less than a week after Modi’s government unveiled historic tax cuts in its federal budget. Taken together, the measures underscore the urgency with which Modi’s government is moving to address the growth slowdown gripping the economy.

Yet, investor response to these steps has been muted throughout the week, illustrating the scale of the challenge facing the government. Bonds fell following the central bank announcement, while the benchmark NSE Nifty 50 index lost 0.2 per cent.

Economists said that despite its 25-basis-point cut, the central bank’s overall actions were relatively restrained. The bank’s monetary policy committee voted to retain a “neutral” policy stance rather than change it to “accommodative,” which would have signaled more rate cuts to come.

Despite the tax cuts, the budget was “contractionary” and the central bank’s ability to cut rates in the future is “limited” at a time the Federal Reserve has decided to hit the pause button on easing, said Indranil Sen Gupta, economics professor at Shiv Nadar University.

Moreover, the Reserve Bank of India announced no new liquidity measures that might have given markets a stronger boost, such as a cut to its cash reserve ratio or additional bond buyback measures.

Meanwhile, some economists have questioned whether New Delhi is relying too heavily on dividend payouts by the central bank to finance its 1 trillion rupees ($11.4 billion) in tax cuts. They also doubt if the reductions can give a significant boost to spending, as only a small fraction of Indian workers pay income taxes.

“India’s growth is still cycling down and will surprise to the downside,” wrote economists at Nomura, projecting further rate cuts by the central bank.

Economists say a raft of new challenges — from weak consumer sentiment to a hit to corporate profits — have emerged for India’s economy over the last year, making a swift growth revival unlikely. Near the top of the list is the uncertainty brought about by the election of US President Donald Trump and the likely upheaval in global trade.

While the South Asian nation hasn’t been directly targeted by Trump, economists say the broader slowdown in global growth damages India’s own outlook. To avoid getting swept up in a US trade war, New Delhi has announced a series of preemptive measures ahead of Modi’s visit to Washington next week, including cuts to India’s tariff regime and the acceptance of unlawful migrants from the US.

“It’s premature to say that we are destined to grow at 6.5% for the longer term,” India’s Chief Economic Adviser V. Anantha Nageswaran said on Monday. “When the global conditions change, we will grow at much higher rate.”

At a press conference on Friday, Sanjay Malhotra, the newly-appointed RBI governor, put forth an optimistic outlook for India’s growth, saying the country should “aspire” to a long-term expansion of 7 per cent, while forecasting growth of 6.7 per cent in the coming fiscal year.

Economists from Standard Chartered said while growth could weaken further this year, the government’s actions this week “have turned in favor of setting a floor for growth, given global uncertainties.”