India Seeks to Woo Foreign Funds, Revive Growth From 5-Year Low

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India rolled back an additional levy on foreign funds and announced a raft of measures to boost economic growth from a five-year low.

The enhanced surcharge on long and short-term capital gains has been withdrawn, Finance Minister Nirmala Sitharaman said in New Delhi Friday. She also announced an immediate infusion of 700 billion rupees ($9.8 billion) set aside in the budget last month to boost capital of banks, and lifting on curbs on government departments to buy new vehicles.

“The enhanced surcharge on FPI goes, in simple words,” Sitharaman said, referring to a budget proposal pertaining to Foreign Portfolio Investors. “In other words, the pre-budget position is restored.”

The measures come after the government was criticized for failing to stem a rout in local equity markets and a slowdown in demand that has impacted industries ranging from automobiles to items of daily use like biscuits and hair oil. The withdrawal of the additional levy on Foreign Portfolio Investors should boost sentiment after overseas funds withdrew more than $3 billion since the measure was announce in July.

Other measures such as bank capitalization and government’s purchase of new vehicles will aid economic growth.

“The measures to boost demand, particularly in the auto sector will be positive for growth,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. “Higher government spending, and the release of payments by the government will also support business.”

Financial markets cheered the move to withdraw the levy, first shared by a government official earlier Friday. The S&P BSE Sensex, India’s key equity index, erased declines and closed 0.6% higher. Rupee reversed losses to advance as much as 0.2%.

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India's economic growth has been on a slide

Sitharaman said banks will be required to link their loan products to the Reserve Bank of India’s benchmark rate, in order to accelerate transmission of the central bank’s policy easing.

While the RBI has cut rates by a total 110 basis points since February, the pass through has been less than desirable for Governor Shaktikanta Das, who’s sought help from all stakeholders to boost growth.

Data due next week will probably show India’s gross domestic product expanded 5.6% in the quarter ended June, slower than the 5.8% pace seen in the previous three months.

Weakening growth numbers won’t come as a surprise. Consumer spending has waned prompting automobile makers to shut factories temporarily to manage piling inventories. A shadow-banking crisis has also weighed on private consumption, which accounts for almost 60% of the gross domestic product.

“Reforms is a continuous process and the momentum of reforms will continue,” Sitharaman said.

Here’s more from Sitharaman’s briefing:

  • Government will provide total cash support of 300 billion rupees to home-finance companies in some relief to shadow lenders
  • Tax refunds to be expedited
  • Startups get relief: angel tax provisions will not be applicable on them and their investors
  • Government departments to “go buy vehicles” to replace old cars in boost for automobiles sector

— With assistance by Ronojoy Mazumdar, Ameya Karve, Vrishti Beniwal, Devidutta Tripathy, and Anirban Nag

(Updates with more details from finance minister’s press conference.)

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