Before Indian Prime Minister Narendra Modi’s visit to the White House, President Donald Trump announced that the U.S. would impose tariffs on its trading partners. This comes at a challenging time for India, which is already facing a slowing economy and reduced consumer demand.
During a joint news conference, Trump stated that India plans to purchase F-35 fighter jets and oil from the U.S. Additionally, the two countries will begin discussions to address the U.S. trade deficit with India. This trade surplus may complicate India’s economy, particularly as it experiences a slowdown in growth.
India’s economy is projected to grow by just 6.4 percent in the fiscal year ending in March, marking the slowest pace in four years. In response, the Modi government recently announced income tax relief for the middle class. Soon after, the Reserve Bank of India cut its benchmark interest rate by 0.25 percent, the first reduction in nearly five years, to encourage economic activity.
However, some economists are skeptical about the effectiveness of the tax relief. Many Indians earn below taxable limits and still struggle to recover from the financial impacts of the COVID-19 pandemic. Kaushik Basu, an economics professor at Cornell University, noted that many who lost urban jobs during the pandemic have returned to their villages, often doing seasonal agricultural work instead of pursuing better-paying jobs in cities.
Dhiraj Nim, an economist at ANZ Bank, believes the tax relief will only have a slight impact on GDP growth, predicting only a 0.2 percent increase. “People might spend a little more but will also save more,” he explained. Ultimately, the relief might not sufficiently offset the significant financial assistance provided.
Moreover, Alexandra Hermann from Oxford Economics warns that the yearly budget lacks comprehensive strategies to tackle employment and skill development, both crucial for sustained economic growth. Currently, only about 2 percent of Indians pay income tax, indicating widespread unemployment and underemployment issues.
Some economists suggest part of India’s slowdown may be due to reduced demand following an initial post-pandemic recovery. Despite earlier hopes for rapid growth, deeper issues within the economy have emerged. Basu stated, “What we are seeing now hasn’t been seen since 1947,” highlighting the persistent inequality that has plagued India.
The government is trying to boost growth through infrastructure spending, but pandemic-related stimulus measures mean it must cut back to meet its fiscal deficit targets. Mumbai’s spending cuts could dampen the positive effects of the recent tax relief.
Trump highlighted India’s high tariffs on American cars and other goods, which are intended to protect local industries. As India, like Canada and Mexico, engages in negotiations to reduce its trade surplus, there may be concessions that could negatively affect local businesses.
Additionally, India recently accepted its first deportees from the U.S. amidst a lack of public protest. Modi mentioned that these individuals were victims of human trafficking, focusing on the need to end such practices.
The U.S. has already announced high tariffs on steel imports, which could affect Indian exports, even as domestic consumption drives much of India’s economy. This dependency is a significant concern that underscores the challenges ahead.
Experts like Kartik Muralidharan emphasize the necessity for substantial economic reform to achieve equitable growth. They note that past reforms often arose during critical external challenges. Muralidharan suggests a need for another watershed moment akin to the reforms of 1991.
Basu also suggests that addressing rising inequality could involve a slight increase in taxes for the wealthy, with funds redirected to support small businesses. He points to the burdens small enterprises face from compliance costs associated with the Goods and Services Tax.
While the government predicts a growth rate of about 6.7 percent for the upcoming year, Nim argues that the more pressing issue is ensuring that income growth is widespread and reaches those who truly need it.
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Economy, Features, Business and Economy, Donald Trump, Financial Markets, International Trade, Narendra Modi, Poverty and Development, Tax, Trade War, Asia, India
