India Changing Course on Retroactive Taxation

There’s been some concern lately that the Indian economy appears to be entering a kind of non-recessionary growth-slowdown. In other words, a reduced rate of its growth potential. That would be very disappointing considering how poor India continues to be, how rapidly it’s grown recently, and how China’s managed to highlight a path toward faster growth over a longer period of time.

The precise culprit for this slowdown is not, I think, very well-understood. But one issue people have pointed a finger at is a legislative proposal for retroactive taxation of foreign firms that invested in India and are deemed to have been avoiding taxes. Obviously firms generally complain when they’re asked to pay more taxes, and retroactive is especially going to make people wary of investing further money in your country. It’s hard to know if reduced foreign direct investment is really causing the growth slowdown (as opposed to being induced by a worsening growth outlook) but it probably didn’t help and is probably good news that the Indian government is backing down on the idea. Still, as Tyler Cowen ultimately concluded the really striking thing about the Indian economy is the lack of growth in the agricultural sector. That’s where half the population—the poorer half—works and the per capita output is strikingly low. The tax issue is almost certainly irrelevant here, and what the Indian government really needs to do to move forward is to get the agricultural sector moving.