Historic tax cuts and the first interest rate reduction in five years, India is set to stimulate the economy

The Indian government is launching a major economic stimulus plan. On Friday, the Reserve Bank of India (RBI) announced a rate cut of 25 basis points, the first in five years. Just a week earlier, the Modi government had introduced a historic tax cut plan worth ₹1 trillion (approximately $11.4 billion). Behind these measures is the noticeably slowing Indian economy. Although India surpassed the UK in 2022 to become the world's fifth-largest economy, economic growth has slowed from 8.2% in the last fiscal year to 5.4% this summer, with growth expectations for the current fiscal year further downgraded to 6.4%. Weak consumer confidence, pressured corporate profits, and rising uncertainties in the global trade environment pose multiple challenges to the Indian economy. The market's reaction to the stimulus measures has been cautious. The bond market immediately fell after the central bank announced the rate cut, and the benchmark NSE Nifty 50 index dropped by 0.2%. The stock market has given back gains from the past six months, and the rupee continues to depreciate against the dollar, reflecting investor concerns about the outlook for the Indian economy. First Rate Cut in Five Years In the federal budget, the Indian government introduced a tax cut plan totaling ₹1 trillion (approximately $11.4 billion). Following this, the Reserve Bank of India, under the leadership of new Governor Mahesh Kumar Jain, announced a 25 basis point cut in the benchmark interest rate, marking the first rate cut by the bank in five years. However, the central bank's overall actions have been relatively restrained. The Monetary Policy Committee voted to maintain a "neutral" policy stance rather than shifting to "easing," which means that there may not be further rate cuts in the future. Professor Gupta from Shiv Nadar University pointed out that, in the context of the Federal Reserve pausing its easing policy, the RBI's room for future rate cuts is "limited." Additionally, the RBI did not introduce new liquidity measures, such as lowering the cash reserve ratio or increasing bond repurchases, which could potentially boost the market. Economists at Nomura wrote: "India's economic growth remains on a downward trend and is expected to experience an unexpected decline," and they anticipate further rate cuts by the RBI. Economic Dilemmas Becoming More Apparent The Indian economy is facing significant pressure from slowing growth. In 2023, India's GDP grew robustly at 8.2%, while GDP growth had already slowed to 5.4% in the third quarter of last year, with growth expectations for the current fiscal year downgraded to 6.4%, raising concerns about this slowdown trend. The performance of the capital market is even more worrying. The stock market has given back gains from the past six months, and the rupee continues to depreciate against the dollar, making the returns of India's capital market appear even smaller on the global stage. (1) Structural Problems and Policy Dilemmas The challenges facing India go far beyond superficial growth slowdowns. During Modi's administration, the number of investment account holders in India increased from 22 million to 150 million, indicating significant expansion in the financial market. However, this prosperity is primarily concentrated among the top 10%, while ordinary people continue to struggle for basic living needs The government has adopted a conservative fiscal policy, focusing spending on large infrastructure projects such as bridges and roads, hoping to attract private sector investment. However, the effectiveness of this supply-side strategy is questionable. Taking airport construction as an example, despite significant government investment in new airports, some routes have been forced to cancel due to insufficient passenger demand. Subramanian, an economist at the Peterson Institute for International Economics, pointed out: "Insufficient job creation leads to a lack of income for people, and wages are suppressed." Currently, India's national minimum wage standard is only $2 per day, and many workers in the informal economy earn even less than this level. (2) Global Challenges Intensify the Predicament In addition to domestic issues, the uncertainty of the global economic environment also poses challenges for India. To avoid getting caught up in the trade frictions initiated by the United States, India has taken a series of preventive measures ahead of Modi's visit to the U.S., such as announcing the country's first-ever tariff reform, including comprehensive reductions in import tariffs on items ranging from textiles to motorcycles. Previously, India had also committed to accepting thousands of illegal immigrants from the U.S. and maintaining the dollar as its trade currency. At a press conference on Friday, the new Governor of the Reserve Bank of India, Sanjay Malhotra, expressed optimism about India's growth prospects, stating that India should "strive" for a long-term growth rate of 7%, while predicting a growth rate of 6.7% for the next fiscal year