India prints to cut taxes

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Via Damien Boey at Credit Suisse:

Trade war negotiations remain in the limelight, with investors fearing that US-China talks had collapsed again on Friday night following the cancellation of a Chinese delegation trip to Montana and Nebraska. However, over the weekend, it was revealed by Chinese officials that the trip was not cancelled because of any difficulty in trade talks. Rather, it was cancelled out of a concern that it would convey the false impression that China was trying to meddle in US domestic politics. The Friday evening response to trade speculation was negative, with stocks weakening and bonds rallying. However, it would not surprise us if some of this reaction is unwound in the Asia Pacific time zone today, given how the news flow evolved over the weekend.

Trade war volatility aside, perhaps the most interesting development of the past few days has been the announcement of Indian fiscal stimulus. The Indian government announced a surprise corporate tax cut, to be entirely funded by central bank remittance of cash to the government. There are several things worth highlighting about this announcement:

  1. In total, the Indian stimulus is estimated to be worth around USD 20 billion. Corporate tax rates will fall to 22% from April 2019 from 30%. The effective rate, including all additional levies will be 25.2%. Moreover, new companies created from 1 October will attract a 15% tax rate and an effective tax rate of 17.01%. This brings tax rates down to the same level as in Singapore, the second lowest corporate tax rate in Asia, next to Hong Kong. In other words, India is showing its hand and willingness to win market share in the trade war. Growth re-balancing away from China and towards other emerging markets is well underway. The net impact on global growth (USD liquidity considerations aside) will be limited by the re-balancing of growth between emerging market exporters.
  2. Indian stimulus is to be funded by the central bank. In truth, fiscal stimulus in all countries (bar European Monetary Union countries) is funded by their respective central bank. Governments spend currency before they raise it. And they do so on over-draft-like terms with their central bank. Bonds are issued later, to mop up the excess interbank liquidity created by the fiscal spending operation, but not the deposits created in the public domain. The announcement about how Indian fiscal stimulus will be funded merely makes it that much more obvious how the mechanics of fiscal stimulus actually work. By mentioning “central bank remittances”, investors will naturally think of a circular reference between state and central bank as “money printing”. But the reality is that fiscal deficit spending is always “money printing”.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.