Source : Forbes, July 17, 2014

The new government of Narendra Modi is committed to deeper tax cuts, and reforming its tax structure. Top down investors take note. This is what you were hoping for from newly minted Finance Minister Arun Jaitley. In an interview with the Times of India, published on Tuesday, Jaitely said, ”higher taxation is against the (Modi’s) ideology.” Jaitley released the country’s new budget on July 10, but many investors were disappointed, hoping for more clues on tax cuts to industry. Recent tax policy has “created a scare” among corporate investors, Jaitley said, who went on to tap himself on the back in regards to the budget. “I’ve provided a complete cushion against powers of Parliament to tax retrospectively to create fresh liability. Even for domestic investors, I’ve created an advance ruling mechanism before they take their decision. I’ve tried to remove discretion, which is responsible for lots of litigation in transfer-pricing matters. As we learn from future experiences, I’m willing to travel a little more distance, but this is the direction,” he was quoted as saying in TOI on Tuesday.

Jaitley and Modi have their work cut out for them.

The economy remains weak, growing under 6%.  For a country roughly the size of India, only a lot poorer, India needs to do better than that. It has infrastructure needs to tend to, and urban growth policies to get companies investing again. Moreover, Modi’s ally in the Reserve Bank of India, Raghuram Rajan, is still battling high inflation. India’s consumer price inflation rose 7.3% yearly in June, moving to a 43-month low, and sharply lower than market expectations of nearly 8%.  The large dip was triggered by food inflation, which slowed further in June to 7.9% yearly, despite a poor start to the monsoon season. Core inflation also moved lower to 7.4% year over year in June. Within the core, housing inflation softened further, falling to 9.1% yearly from an average of 10.2% over the previous 12 months. For Rajan, the decline is good news, but the numbers are still too high. Investors are banking on India’s dynamic duo of Modi and Rajan to be the change agents of this economy following roughly three years of falling growth, and rising inflation.