n° 162 – September/October 2019

The government’s recent radical move to lower corporate tax to boost the animal spirits of Indian industry could not have come at a more opportune time. The high-frequency indicators were showing that India’s economic momentum had dropped to a record low in August 2019 - the worst performance since October 2014.

The automotive slowdown intensified, with passenger vehicle and two-wheeler sales declining 41% and 22%, respectively, when compared to August 2018. Tractor sales fell by 16.5% year on year, suggesting that the slowdown is equally anaemic in the countryside.

The government is working overtime on a vehicle scrappage policy which will define an age limit for all vehicles on India’s roads before they are sent for compulsory scrapping. Combined with some tax incentives against new purchases, this should hopefully jump-start auto sales in times to come.

While reduced taxes could incentivize investments and trigger a quick turnaround in economic activity, it would be hard for the government to recoup its revenue losses through these cuts. India also remains vulnerable to any global mishaps. The external metrics could quickly change with its trade balance deteriorating over the past few months and oil prices at elevated levels. If the US dollar continues to strengthen, this could put further pressure on the current account by making imports costlier.

A strong revival in investment and exports could help India navigate her way out of both domestic and external weaknesses. As global value chains get reshaped under the shadow of the US-China trade war and the impending launch of a long-awaited pan-Asian trade deal (RCEP), India’s more competitive tax rates could help the economy grab a larger share of the global trade pie. It remains unclear whether or not that will happen, or indeed how long it will take for that to happen.

India’s economic momentum may have slowed to historic lows but there is no evidence yet to suggest that economic activity has bottomed out. The government is expected to keep unleashing a slew of fiscal measures in the coming months with the aim of returning to a growth trajectory of 7% plus.