India moves up half a gear

Prime Minister Narendra Modi’s government is set to dramatically reshape India’s economy.

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Narendra Modi: moving slowly but surely in the right direction

Prime Minister Narendra Modi's government "is set to dramatically reshape" India's economy, says Iain Marlow on Bloomberg. The government is about to implement a national sales tax (the GST, the equivalent of our VAT), which will sweep away dozens of local levies that had hampered growth. The GST will launch on 1 July.

When the reform was first mooted, there was talk of a single rate. That would have been "ideal", says Una Galani on Breakingviews, but months of horse-trading has instead produced a tiered system, with bands of 5%, 12%, 18%, and 28%, while some items, including luxury cars and fizzy drinks, will incur an additional levy.

The tiers are designed to avoid a jump in inflation, which the advent of simpler systems has caused in other countries an important consideration as Modi is due for re-election in 2019. But "the downside of the complexity" is a lower boost to growth from simplification. HSBC reckons that the fillip to GDP could now be half as big as it originally thought: 0.4% in three to five years. Still, by "widening the tax net" in India's "largely informal $2trn economy", says Marlow, it should provide more cash for boosting education and infrastructure, laying the foundations for faster growth.

It also bodes well because it burnishes Modi's reformist credentials. Considering India's size and "tradition of intense lobbying", says the Financial Times, his government deserves credit for pushing it through at all.

State investors stock up on gold

Markets seem very relaxed about the outlook these days, a view expressed in unusually low volatility. One group of investors, however, is taking no chances. The world's top state investors, encompassing central banks, public pension plans and sovereign-wealth funds, increased their net gold holdings to 31,000 tonnes in 2016, the highest level since 1999, as they increased their overall assets to $33.5trn, a survey has revealed. The central banks of Russia and China bought the most.

Political shocks last year, including the Brexit vote and Donald Trump's election, spurred buying, and state investors are still worried about turbulence amid Trump's possible impeachment, says Attracta Mooney in the Financial Times. They also fear a jump in inflation, which would also explain why over a quarter of them plan to cut their developed-market bond allocation.

Greece's new sticking plaster

Greece has received yet "another 11th hour credit lifeline", says Reuters. The €8.5bn tranche of its latest bailout package will prevent it defaulting on payments due in July. The left-wing populist government is "meeting its fiscal targets and grudgingly passing reforms", says Neil Unmack on Breakingviews.

This kerfuffle was largely "about reconciling creditors who are on the hook for debt worth 180% of Greek GDP". The International Monetary Fund (IMF) has advocated debt forgiveness to cut Greece's unsustainable debt pile. Germany wants to avoid explicit debt restructuring promises before a national election later this year.

The deal is a typical fudge by the European Union. The EU will consider extending Greek bond maturities by up to 15 years (the average maturity now is 30 years) and deferring interest payments. But it won't decide on specifics until 2018, after which the IMF will chip in with its loans; it's far from clear that the relief will make the debt pile bearable. The lack of specifics "keeps Greece in financial limbo", says Unmack. Not for the first time, this problem is being managed, rather than resolved.

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