BOOST TO ECONOMIC GROWTH....

• INDIA NEWS

• Updated September 21, 2012, 7:44 a.m. ET

                  India Cuts Tax on Overseas Loans  By PRASANTA SAHU And SUDEEP JAIN

NEW DELHI--India's government Friday approved a large tax cut on overseas loans taken by local companies, shrugging off mounting political protests and choosing to continue with growth-supportive steps which have boosted investor sentiment and catapulted local stocks to their highest level in 14 months. The tax rate on the interest paid to overseas lenders by local companies has been reduced to 5% from the earlier 20%, Finance Minister P. Chidambaram told reporters. The move was proposed in the federal budget in March, but cleared only Friday.

The tax cut will start with retrospective effect from July 2012 and run to June 2015. It will apply to overseas loans and long-term infrastructure bonds, said Mr. Chidambaram. The government also held out the prospect of more reforms, saying that the federal cabinet may next week consider a proposal to increase the limit for foreign direct investment in local insurance companies. The latest steps come a week after the government unveiled far-reaching -- but controversial -- overhauls to boost growth, which include allowing in more foreign investments in multi-brand retail, selling stakes in state-run companies and reducing subsidies on the sale of diesel. The steps have sparked widespread protests across the country. A member of the ruling Congress Party-led federal coalition has pulled out of the government, saying the reforms will drive up prices and hurt the common man.

The withdrawal by the Trinamool Congress -- headed by West Bengal Chief Minister Mamata Banerjee -- has reduced the government to a minority in parliament, but it is unlikely to fall because it has the support of other parties. Local stocks were boosted Friday also by news that the government has approved the operational features of a tax-saving program for retail investors in share markets. The Rajiv Gandhi Equity Savings Scheme -- named after a former prime minister who was assassinated by Sri Lankan Tamil guerillas in 1991 -- will allow an income-tax waiver of 50% on new equity investments of up to 50,000 rupees ($904) by retail investors who have an annual income of less than 1 million rupees.

Investors will have to keep their equity investments locked in for at least three years to get the benefit. Investors cheered the government's moves to boost growth: The Bombay Stock Exchange's Sensitive Index closed 2.2% higher at 18,752.83 points after touching 18,866.87---its highest level since July 2011. The rupee surged to a more than four-month high of 53.32 to the U.S. dollar. The greenback was last quoting at 53.43 rupees. The government's recent steps have injected a strong dose of optimism into India's economic picture. The country's gross domestic product growth has slowed to its lowest in nearly a decade. India faces threats also from its wide budget and current-account deficits, as exports and capital inflows suffer due mainly to the global economic troubles.

Analysts say the measures will also support the rupee as the expected inflows will help narrow India's wide current account deficit, which surged to a record high of 4.2% of gross domestic product in the fiscal year through March 2012. The current account gap is seen as the main culprit behind the rupee's 10% fall against the U.S. dollar over the past 12 months. "The risk of a [sovereign debt] downgrade has reduced dramatically over the past few days, which has pushed the rupee into a new trading range of 53.0-54.0 [to the U.S. dollar]," said Ananth Narayan G, regional head for fixed income, currency and commodities at Standard Chartered Bank. The local currency had hit a record low of 57.33 to the dollar on June 22.

Earlier this year, Standard & Poor's and Fitch Ratings had both cut their outlook on India's long-term debt, citing the large fiscal deficit and the lack of progress on overhauls. The tax rebate on overseas loans announced Friday is likely to reduce the cost of loans by as much as one percentage point, said Randhir Singh, director of capital markets and treasury solutions at Deutsche Bank. Some companies had been waiting for a tax rebate to raise loans overseas, he said, adding that the step is likely to increase debt issuances.

Because of lower interest rates, loans overseas are significantly cheaper, but the country's central bank restricts the amount of money that companies can raise offshore so as to manage the country's external debt. In recent weeks, however, the Reserve Bank of India has eased curbs on overseas borrowing for companies in the manufacturing and infrastructure sectors to boost  growth

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