46 TheEconomistAugust 17th 2019
1I
n may champagne corks popped as
Mumbai’s bankers, investors and indus-
trialists feted the re-election of Narendra
Modi as India’s prime minister. His Hindu
nationalist Bharatiya Janata Party’s defeats
in regional elections last autumn raised
the possibility of a return to power of the
left-leaning Congress party, which most of
India Inc views (with some justification) as
anti-business, corrupt and fiscally feck-
less. Mr Modi’s landslide victory therefore
set corporate pulses racing. The Mumbai
stockmarket soared to a record high. So did
expectations that he would follow first-
term coups like a new bankruptcy code and
a goods-and-services tax with fresh busi-
ness-friendly measures. “Modi knows how
to change the goalposts,” gushed one re-
spected tycoon on election night. His fel-
low moguls nodded in agreement.
Two months later, the elation is gone.
Despite an uptick in August, Mumbai’s
Sensex stock index is about as close to Oc-
tober’s lows as it is to June’s highs. In July
foreigners pulled more money out of Indi-
an equities than they put in. India’s cau-tious business press has begun to criticise
the government. So too, even more ginger-
ly, have its cowed business leaders. “There
is no demand and no private investment,”
groused Rahul Bajaj, chairman of Bajaj
Auto, a motorcycle-maker, at its annual
meeting in late July. “So where will growth
come from?” The remark, widely interpret-
ed as a swipe at Mr Modi, encapsulates In-
dian business’s disenchantment with the
man they once regarded as their champion.Nirvana no more
The immediate cause of the mood swing
was the budget, presented on July 5th by
Nirmala Sitharaman, the newly appointed
finance minister. Business folk tuned in to
the two-hour presentation expecting less
red tape, fewer tariffs, more incentives for
investment and lower taxes. They got the
opposite.
At an international bank, analysts’
feigned interest turned to mild bewilder-
ment, then despair, as Ms Sitharaman re-
cited the budget’s 143 provisions. The top
marginal tax rate for high-earners wouldincrease from 35.9%, already above the lev-
el in most emerging economies, to 42.7%,
roughly as much as the average in the oecd
club of mostly rich countries. The cor-
porate-tax rate for big companies stayed at
35% (compared with a global average of
23%, and 21% in America). Or at least it ap-
peared to: a new levy of 20% on share buy-
backs, on top of existing charges, would
bring the capital-gains rate above 40%,
among the highest in the world. Add in a
tax on dividends and a recently imposed
charge on recipients and, all told, the gov-
ernment could skim off 60% of corporate
profits. New tariffs would be slapped on
products from cashews to newsprint to fi-
bre-optic cables. One banker recounts lis-
tening to the speech from the shower, the
last vestige of optimism washing down
the drain.
As observers unpacked the budget’s
convoluted text over the subsequent
weeks, unintended consequences became
apparent. To close loopholes, the bill ex-
tended taxes to the kinds of trust used by
foreign portfolio investors, whom the gov-
ernment hopes to court. This turned them
from heavy buyers of Indian equities to net
sellers. Some high-earners wonder if it is
time to decamp to more functional, busi-
ness-friendlier Dubai or Singapore—espe-
cially after India’s parliament amended the
Companies Act on July 30th to let the gov-
ernment jail executives at big firms that do
not spend part of their post-tax profits on
corporate social responsibility.Business in IndiaModi blues
MUMBAI
Bosses and investors are growing disenchanted with their erstwhile championBusiness
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