Global tax-cut dominoes ( part I ): India
Gregory Fossedal
December 15, 2003
Copyright © United Press International
Washington, DC -- President George Bush has advanced a
kind of inverse domino theory for the Middle East,
arguing that establishing emergine democracies in some
Arab countries may help spread it to others. There
may, however, be another such policy -- or at least,
another domino effect -- of significant
importance to investors.
Aggressive U.S. cuts in tax rates on various types of
income have helped spur growth rates that are envied
around much of the world. In recent weeks, such
disparate countries as Hungary, Korea, Germany, Ghana,
and Peru have started -- and some have just enacted --
rate cuts of their own, on corporate, personal, or
investment income. Some, wisely, are reducing rates
on all three, improving incentives across the board.
The initial reaction on several of these stock markets
suggests a prudent bullishness on the part of domestic
and international investors. In the second part of
this series, we'll survey several of those tax-cut
(and a few tax-hike) dominoes, which span five or six
continents. Today's first part is focused on India,
where the opportunity may be especially inviting.
 Finance Minister Jaswant Singh is cutting tax rates again, contributing to a sunny outlook for India. |
But using the Indian boom to cut taxes further, as Bush did in the U.S. in 2001, would add "insurance" of future growth, Singh says. And it points in a direction of continued growth and incentive-minded policy reform.
Not surprisingly, the Indian stock market jumped for joy, outpacing gains in most world markets. But there's more where that came from.
In a sense, Singh's move should have been expected. India has an institutional inclination for tax rate cuts going back to the days of Rajiv Gandhi, the leader of the center-left Congress party and prime minister in the 1980s. The Gandhi tax cuts of 1983-85 twice forced the Indian stock market to briefly close as traders frantically bid up stocks more than 20 percent in a few hours.
The Wall Street Journal's Paul Gigot was one of the few journalists in the world to even notice the connection, let alone write about it. In the years since, however, more and more invesors and business journalists have picked up on the theme -- as have some Indian politicians.
In late Feburary, 1992, the country repeated the Bombay stock bounce. This time, the news was heralded, and connected to surging equities prices, by the Financial Times, The Economist, and others. "As Paul Gigot goes, so goes the FT -- it just takes a decade," a Journal colleage of Gigot's quipped.
In short, there seems to be an almost annual budget surprise -- as "the bottom line" observed last year at this time -- from the Indian finance ministry. Yet, surprisingly, it still seems to surprise people. Is there any surprise left this time?
Markets anticipate -- relentlessly. It's tempting to think that the good news about next year's possible tax cut is already largely discounted by the market. But it isn't.
One reason is that Congress is out, and the Bharatiya Janata Party, or BJP, now rules India. The adoption of a tax-cutting ethos by the new center-right party, with strong religious elements, constitutes a huge potential paragidm shift. A similar shift may be underway in such countries as Turkey, Afghanistan, Iraq, and even Egypt -- with synergistic feedbacks for Mr. Bush's other dominoes.
The second reason is Mr. Singh himself, the former foreign minister, and a kind of James-Baker-figure on the Indian scene today. When the CEO of one of India's largest banks begain to put the case for tax cuts to Mr. Singh in terms of the surging U.S. stock market several weeks ago, Mr. Singh interrupted him to explain that he was preadhing to the choir.
"You don't need to tell me about Mr. Bush's tax cuts," Singh said. "I have seen them, I like them, and I intend to implement them."
One interesting feature of Singh's proposal is that it is not tilted towards either "business" or "personal" income, savings, or consumption. Instead, the Singh bill, like Bush's 2001 and 2003 cuts in combination, would reduce rates across the board. In fact, they're slightly in favor of personal income, which in India as in the U.S. is the code used by many small businessmen to pay taxes -- and the major "wedge" or penalty paid by companies and to their most productive workers.
It should also be noted that the existing Indian tax code, like many in the world, has a slight bias in the opposite direction today, with a top corporate rate several percentage points below the top personal rate.
Mr. Singh seems to understand, as few leaders do, that under most national tax codes, the benefits of merely cutting "business" tax rates as opposed to "personal" tax rates are dubious at best. (A 1997 study by the Alexis de Tocqueville Institution, "It's a flat, flat, flat tax world," noted the benefits of making tax codes "longitudinally flat," i.e., flat across different income groups and types. An excerpt from the study appeared that fall in The Wall Street Journal.)
Many flat tax advocates in the U.S., alas, seem to have forgotten that lesson, contained many years ago in such books as Jude Wanniski's "The Way the World Works." But Mr. Singh hasn't.
Thus, on economic grounds, the emerging Indian tax cut approach should out-perform the tax cuts being cooked up in many foreign capitals. On political grounds, it's solid, it builds a broad coalition of support across different interests -- and thus, is likely to be robust at the ballot box.
Indians head to the polls in a few months for parliamentary elections. It's probably no accident that Singh's tax cut play emerges at this time. It also won't be an accident if his party does well, and internalizes the lesson that what's good for taxpayers is good for the economy, and, in turn, good election strategy. If the BJP moves in this direction for "political" reasons, good for the BJP.
THE BOTTOM LINE
Institutional investors with the ability to pick individual sectors and companies may want to focus on India's banking sector, which has lagged the boom in technology stocks. But the tech surge will also continue in the economy, and we wouldn't under-weight that either. Short-shoppers might want to take a look at various commodity producers which are still not competitive, and are likely to be the target of government restructuring efforts in the coming months.
Small investors can take advantage of a number of broad-based funds on the New York Stock Exchange, such as the India Fund (IFN). There are also banks (ICICI Bank, or IBN), internet offerings (Rediff.com, or REDF), and one of the best software companies in the world (Infosystems, or INFY). As always, my own clients and my own funds may well be long or short some of the securities mentioned, and you should consult with your personal investment professional before making any decision to buy or sell.
Singh's goal, like that of similarly ambitious tax-cutters in Argentina and Mexico in the 1990s, is nothing less than to help India rise to its natural standing in the club of the world's advanced democracies over the next generation. The country, as a headline cheered in the Indian Express newspaper above its interview with Singh, may indeed be ready to "join the developed world." It should be a long and profitable ride.
(Gregory Fossedal, a senior fellow at AdTI and its former former chairman, manages international investments for Emerging Markets Group. His firm may hold some of the securities mentioned his articles or advise others on them. These positions and opinions are subject to change without notice, and UPI, AdTI, and EMG assume no responsibility for investment decisions made by readers. Investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)
