India’s pain of economic transition: Strengthened regulation amid economic downturn

Editor's note: Recently, the Indian government has consecutively imposed substantial tax bills on several foreign automotive companies. German car maker Volkswagen India faces a tax reassessment of $1.4 billion, setting a record in India, while South Korea’s Kia Motors has also received a tax demand totaling nearly $170 million. These staggering penalties have sparked a strong reaction within the global business community. This series of hefty penalties not only directly threatens the normal operations of the affected companies but also has raised significant concerns among international investors about the continued deterioration of India’s business environment.

As the Indian government launches an unprecedentedly strict tax audit of foreign companies, the country's economy is facing severe downward pressure. The Indian Central Statistical Office has forecast that the country's GDP growth will slow to 6.4% in the 2024-2025 fiscal year, marking a sharp decline from the previous year's 8.2% and reaching a four-year low. Analysts attribute this slowdown to multiple factors, including weak manufacturing performance, declining corporate investment sentiment, and the global economic slowdown, all of which have collectively weighed on India's economic growth.

In response to the weakening growth momentum, the Reserve Bank of India (RBI) on February 7 made its first interest rate cut in nearly five years, lowering the benchmark rate by 25 basis points to 6.25%. While all six members of the RBI's monetary policy committee (MPC) unanimously supported this decision, the monetary policy stance maintained at "neutral", underscoring the cautious outlook held by policymakers on the economic future. RBI Governor Sanjay Malhotra emphasized that considering the existing growth-inflation dynamic, the neutral monetary policy stance should be upheld. This cautious stance has led to speculation about whether India will continue to cut rates in April.

In addition, India's economy is facing a new round of external shocks. On February 10, U.S. President Donald Trump announced a 25% tariff on all imported steel and aluminum products, and plans to introduce reciprocal tariffs on other countries. India could be the most vulnerable to "reciprocal" tariffs, according to estimates by several research firms. However, MUFG Bank also indicated that "the good relationship between Trump and Modi historically should imply negotiation being more likely than not".

Under mounting pressures, the Indian rupee has continued to depreciate, hitting new historical lows multiple times, highlighting international concerns about India's economic outlook. Data shows that foreign capital has net exited India by nearly $10 billion this year, causing significant declines in major Indian stock indices such as the BSE Sensex and Nifty50. Some market analysts point out that the Indian government's decision to intensify tax audits of foreign companies at this time may be driven by a need to increase fiscal revenue, but this approach is akin to "drinking poison to quench thirst." Scholars have suggested that the Indian government needs to strike a balance between increasing tax revenue and maintaining a favorable investment environment. Excessive and harsh tax regulations could undermine India's attractiveness as a global investment destination, which would be highly detrimental to its economic growth goals.

Article by Chen Xiaoyang, Guangming Daily

Translated by Wang Xinyuan, Guangming Online

Find the original article at https://news.gmw.cn/2025-02/12/content_37845590.htm