India takes tax steps to boost economy

Posted on September 21, 2012

India’s government announced further steps to boost the economy on Friday and shrugged off attacks from left and right over cuts in fuel subsidies and the opening of the country’s retail sector to foreign investors.

Palaniappan Chidambaram, finance minister, lowered the tax on foreign borrowings by Indian companies from 20 per cent to 5 per cent and approved tax concessions for first-time small investors in the stock market, a decision he said was “to promote an ‘equity culture’ in India”.

    Those were the latest steps in a flurry of measures during the past week by Mr Singh’s Congress-led coalition to liberalise the Indian economy and reverse a sharp slowdown in growth.

    Indian financial markets have risen strongly on the back of the reforms and an influx of foreign capital on Friday pushed the benchmark Sensex index of leading shares to its highest level for more than a year.

    The newly optimistic mood bolstered the country’s battered currency. The rupee had fallen sharply this year because of lower growth and deteriorating public finances but closed the week at its highest level since May.

    The rupee’s rally was helped by fresh inflows from foreign institutional investors, with offshore funds bringing at least $1.2bn into Indian equity markets after last week’s move to liberalise ownership rules in the retail and airline sectors.

    “This is a relief rally,” said Sumant Sinha, chief executive of Renew Power, a New Delhi-based wind farm developer. “The market is relieved that the government is actually bothering to do something and hasn’t collapsed in the process.”

    “But what they’ve done is just one step,” he added, “and it’s not really going to make any quick difference to the growth rate.”

    The renewed commitment from Manmohan Singh, prime minister, to economic reform has been effusively welcomed by foreign and domestic investors but has caused an uproar among the country’s political parties, with rightwing and leftwing opponents of reform joining forces to attack the government.

    Mamata Banerjee, the populist chief minister of West Bengal and head of the Trinamool Congress party, is withdrawing her support from the coalition, leaving it without a guaranteed majority in parliament.

    The opposition Bharatiya Janata party joined a day of sporadic strikes and demonstrations against the reforms on Thursday. Backed by many small shopkeepers, the Hindu nationalist BJP has attacked the idea of foreigners investing in supermarkets and department stores.

    “Pen, pencils, notebooks would not be sold by your neighbourhood shopkeeper but by some gora [foreigner],” said Narendra Modi, chief minister of Gujarat state. He accused Mr Singh of redefining democracy into something “of the foreigners, by the foreigners, for the foreigners”.

    Government ministers, however, say they are confident they have the parliamentary votes they need to stay in power. The Samajwadi [Socialist] party said it would support the coalition and its secular credentials because Samajwadi “does not want to let communal forces come to power”.

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