India weighs a tax cut to win over foreign investors. Will it work?

Hello, this is Priyanka Salve, writing to you from Singapore.

Welcome to the latest edition of “Inside India“ — your one-stop destination for stories and developments from the world’s fastest-growing large economy.

Once a favorite emerging market for foreign investors, Indian equities have been losing their charm. Foreign holdings of Indian stocks are currently at an all-time low of 14%. Now a tax cut, which puts India on par with several Asian markets, is being proposed to win back these investors.

This week, I spoke with experts to find out whether a tax cut alone can restore the Indian stock market’s appeal to foreign investors.

Any thoughts on today’s newsletter? Share them with the team.

On Monday, Reuters reported that India’s capital market regulator has urged the government to scrap the LTCG tax for foreign investors.

One of India’s oldest and most prominent industry bodies, PHD Chamber of Commerce and Industry, last week asked the government appealing to abolish the tax.

It argued that the capital gains tax was increased in 2024 at a time when the stock market was “near record highs” and as the market conditions have now changed, the government needs to review it.

The country’s Finance Minister Nirmala Sitharaman on Monday acknowledged the exit of foreign capital outflows and added she would consider the calls for reviewing LTCG tax, as per local media reports.

These demands come at a time when foreign investors’ appetite for Indian equities has sharply declined. As per a Nomura report on Monday, foreign holdings in Indian stocks are at an all-time low of 14%.

Experts agree that the removal of the tax cut would improve foreign investors’ sentiment by putting India’s tax regime on par with other emerging markets. But the tax cut alone may not be enough to bring back foreign investors in droves, they said.

“A tax cut helps at the margin, but allocators tend to buy expected returns, not tax breaks,” said Amit Bhartia, portfolio manager at Singapore-based Delorean Partners. He added that foreign investors have exited India as earnings growth became less predictable, while risks shot up.

Bhartia highlighted that foreign investors put in about 570 billion rupees ($6 billion) into Indian equities in September of 2024, and a month later pulled out 940 billion rupees to chase cheaper Chinese stocks. “The tax rate didn’t change between those two months. The perceived relative return did,”…