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Reduction of Corporate Tax and Angel Tax Removal to Strengthen India-US Economic Ties

2024-07-31 00:06:28.708000

India's Union Finance Minister Nirmala Sitharaman presented a future-ready budget that aims to realize the vision of 'Viksit Bharat' by raising spending to generate more jobs and spur economic growth. The budget includes the abolition of the angel tax, which is seen as a landmark decision for the start-up ecosystem in India. The fiscal deficit target for FY25 has been reduced to 4.9% of GDP, down from the 5.1% target in the interim budget. The USA India Chamber of Commerce commends the finance minister for maintaining fiscal discipline and believes it is crucial for sustainable economic growth and investor confidence [b53345a7].

India aims to achieve a fiscal deficit of 4.9% of GDP for FY25, revised from the previous target of 5.1% set in the interim budget. The gross borrowings are estimated at Rs 14.01 lakh crore. Finance Minister Nirmala Sitharaman stated that the government will continue on the path of fiscal consolidation, aiming for a fiscal deficit below 4.5% by FY26. The fiscal deficit had increased from 3.8% in FY20 to 9.5% in FY21 due to increased expenditures during the Covid-19 pandemic. The budget is an important platform for the government to establish its medium-term economic vision and reform agenda. The government is incentivized to project stability and focus on fiscal consolidation despite the weaker political mandate [2927d0e3].

India's sovereign rating could be upgraded within the next 24 months if the government is able to bring down the fiscal deficit to 4% of GDP. The trigger for the upgrade would be the general government deficit, which includes the central and state governments, falling below 7% of GDP, with a significant portion of the reduction driven by the central government. The central government aims to reduce the fiscal deficit to 5.1% of GDP in the current fiscal year, down from 5.63% in 2023-24. S&P had previously upgraded India's outlook to positive in May, while maintaining the rating at 'BBB-'. India has experienced an average growth rate of 8% over the past three years, driven by domestic consumption and infrastructure investment. S&P estimates that India's economic growth will be 6.8% in the current fiscal year, slightly lower than the 8.2% growth in the previous year. India remains the fastest growing economy in the Asia region, and the impact of the COVID-19 pandemic on Asian economies is receding as growth begins to accelerate [1ba7ef6b].

India's economy continues to grow while the fiscal deficit is contracting, making it an attractive destination for foreign fund inflows. The country's central fiscal deficit has decreased from 9% to a projected 5.1% in FY2025, while the economy is still growing at a rate of 6.5-7% in real terms and 10-11% in nominal terms. Finance Minister Nirmala Sitharaman has set targets to further reduce the fiscal deficit to 5.1% of GDP for FY2025 and 4.5% by FY2026 [cea7db39].

Rana Gupta, Senior Portfolio Manager and India Equity Specialist at Manulife Investment Management, believes that India will remain a top candidate for emerging market flows. He expects the US Federal Reserve to initiate a rate cut cycle in June-July, which will further boost India's attractiveness to foreign investors. The market is eagerly awaiting assurance on rate cuts, and the Fed has indicated its willingness to cut rates if the economy slows down. The Federal Open Market Committee (FOMC) recently announced that it would not reduce interest rates until it has greater confidence in inflation moving toward its target rate of 2% [cea7db39].

Gupta's positive outlook on India's economic prospects is supported by the country's strong growth momentum and the government's commitment to fiscal discipline. Despite the challenges posed by inflation and the need to balance economic growth with inflation control, India's fiscal deficit is on a downward trajectory. This, coupled with the ongoing growth of the economy, makes India an attractive destination for foreign fund inflows. The combination of a narrowing fiscal deficit and sustained economic growth bodes well for India's position as an emerging market [cea7db39].

India's newly re-elected Prime Minister Narendra Modi's government has pledged to maintain fiscal prudence and continue with economic reforms in the country. The government aims to achieve a $5 trillion economy by 2024 and plans to focus on infrastructure development, job creation, and boosting exports. The government will also work towards simplifying the tax system and improving the ease of doing business in India. The government's policies will be aimed at attracting foreign direct investment and promoting entrepreneurship in the country [896cb61a].

Reduction of corporate tax in the 2024 Indian Budget and removal of Angel Tax are among the measures that will promote India-US economic engagement, according to Prof. Krishnamurthy Subramanian, Executive Director at the International Monetary Fund (IMF). Subramanian highlighted the reduction of Corporate Tax from 40% to 35% and the removal of Angel Tax as measures that would encourage foreign companies to set up branches and offices in India, boost foreign inflows, foster innovation and entrepreneurship, and strengthen the foundations of India's economy. The India-US partnership is expected to further strengthen in the coming years. The discussion also focused on simplifying tax procedures, fiscal management, Indian investment in digital infrastructure, and reduction of customs duty on a range of goods in the budget [07fe62e1].

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