Can Abenomics-Inspired Strategy Unlock $2 Trillion Boom For India?

India’s Economic Strategy: A Services-Led Growth Model Inspired by Abenomics

Over a decade ago, Scott Bessent, now the U.S. Treasury Secretary made billions of dollars in profits with the Abenomics Trade, leveraging the bold economic reforms introduced by former Japanese Prime Minister Shinzo Abe. Today, with discussions in Washington, D.C. revolving around potential tax cuts under a new Trump administration, echoes of Abenomics are influencing global economic debates. For New Delhi, the pressing question is how to craft a strategy that fuels economic expansion and attracts global risk capital in a world where fiscal policy is beginning to gain precedence after almost 2 decades of a monetary policy driven world order.

The Global Battle for Capital and Trade

In an increasingly interconnected world, economies must compete and cooperate to secure global investments, enhance trade, and drive sustainable growth. While India's recent focus on manufacturing and agriculture is critical, its true growth catalyst lies in the services sector. India must draw lessons from Shinzo Abe's economic playbook and tailor them to its unique strengths.

Why Services Hold the Key to India's Future

The Indian services sector already contributes over 50% of the country’s GDP, making it the dominant force in the economy. Over the past decade, its Economic Value Added (EVA) has risen by 5% to 55.3%, with an impressive growth rate of 8.3%. Despite its potential, the sector remains burdened by a relatively high tax rate of 18%.

Abenomics For India: A Bold Tax Reform - Slashing GST on Services from 18% to 5%

We propose a decisive fiscal policy move: cutting the Goods and Services Tax (GST) on services from 18% to 5%. The rationale is clear:

1. Boosting Productivity and EVA: Lowering taxes will energize the services sector, which already exhibits exceptional productivity and high EVA contributions.

2. Enhancing Economic Velocity: The services sector naturally has a higher velocity of money, meaning that each rupee circulates more rapidly, stimulating broader economic activity.

3. Unlocking Capital for Growth: Despite the presence of IT firms in the NIFTY 50, the index remains skewed towards an industrial economy. However, the top 30,000 companies in India generate $1 trillion in revenues, many of which are in services. With tax savings, these firms can reinvest in expansion, delivering higher Returns on Equity (ROE). Essentially, like a company with multiple divisions, a country needs to compound its capital at high rates of return. A dollar of tax savings in services will compound at a far greater growth rate than via spending elsewhere. The fact that services has contributed to over 50% of job creation and over 50% of EVA with a 18% tax slab shows the real potential.

4. Strengthening Infrastructure Financing: Rather than directly financing infrastructure, the government should focus on creating efficient tax structures and trust-based mechanisms to attract long-term global capital. There is substantial global appetite for stable, bond-like investments from pension funds and institutional investors looking for secure returns.

A Proactive Fiscal Approach for Sustainable Growth

As global economic policies continue to evolve, India must seize the moment. For India, the services sector represents an untapped goldmine that can outpace traditional manufacturing-led models. By prioritizing targeted tax reforms, facilitating global capital inflows, and enabling high-compounding economic growth, India can position itself as a powerhouse in the global economy.

Disclaimer: In the article "Can India’s Abenomics-Inspired Strategy Unlock a $2 Trillion Services-Led Economic Boom?" above - Any views, comments or communication (above or in the past) should not be construed to be investment advice by Alternative Growth (hereafter referred to as “AltG”) in any form whatsoever. AltG does not make an offer to sell or solicit to buy any securities.