The recent government speeches in China and India have struck a relatively prudent tone when it comes to fiscal policy. From the Third Plenum in China to the first budget speech under the third term of the Modi government in India, it seems both nations are charting a course that starts to focus on fiscal discipline rather than large-scale distribution of funds.

Both the Chinese and Indian governments appear intent on reining in excessive spending and direct handouts to the public. In China, there was little focus on supporting consumption beyond the Renminbi (RMB) 300 billion funds released from the RMB 1 trillion insurance of ultra-long special Central Government Bonds. In India, the government maintained capital expenditure at Rupees (Rs) 11.1 trillion while lowering the estimated budget deficit to 4.9% of GDP down from the 5.1% budgeted in February.

Chart 1: India Budget Deficit-to-GDP Ratio: 2020 – 2025E

^{Source: DWS, India Budget Estimates, as of July 30, 2024}

Both countries appear to be prioritizing ways to optimize tax revenue. In China, Securities Times have revealed the potential for new taxes to be levied by local governments to fund local government spending amid falling fiscal income as a result of slowing economy. India also increased capital gains tax on financial assets, raising short-term capital gain tax from 15% to 20% and long-term capital gains tax from 10% to 12.5%. However, while China plans to increase consumption tax to improve local government finances, India is providing tax relief to individuals and cutting corporate tax rates. Closely related is China’s continued promotion of growth through supply-led policies, such as encouraging private investment in key growth industries like artificial intelligence (AI) and quantum science. In sharp contrast, India is placing its bets on growing the economy through private consumption, although the tax cut does not benefit a significant portion of the population and therefore might have a limited impact on boosting consumption.

^{Source: National Bureau of Statistics of China, as of July 30, 2024}

Speculation, particularly in the property market, is also clearly in the crosshairs. China’s consistent reluctance to bail out unsold property inventory and India’s move to remove inflation indexation benefits for capital gain tax send a clear message – the days of unbridled real estate speculation may also come to an end in India.

Besides reining in excessive spending and optimizing tax revenue, manufacturing growth is a key priority for both India and China as they have logically thought out their self-reliance strategies. In India, they have lowered import duties for equipment used in solar and specific telecom equipment manufacturing and introduced a credit guarantee scheme targeted at small and medium-sized Enterprises (SMEs). In China, the reform resolution pledged to keep the share of manufacturing stable and lower its cost and tax burden, while promoting high-tech sectors such as new-generation IT, AI, new energy, and new materials.

While there are similarities, there are also differences. China has put more emphasis on the role of local governments and state-owned enterprises (SOEs) in the third plenum. For SOEs, the resolution highlights their role in key sectors related to national security, public welfare, and strategic emerging sectors. Further SOE reforms could happen in energy, rail, telecom, water conservancy, and utility.

The labor market is also in focus in both countries, with an aim to grow the labor force. China has proposed plans to defer retirement. In India, they focus on creating jobs, which was one of the lessons learned from the recent defeat of the Modi government. A series of programs, including handouts to employees, incentives for companies hiring new workers, and skills development programs, have all been proposed in the budget.

Against the backdrop of deglobalization, China and India seem to have taken different approaches. China is laser-focused on strengthening domestic economic capabilities and supply chain resilience. In contrast, by reducing and exempting tariffs on a wider range of goods, India is on a journey to further integrate itself into the global economy. Of course, both countries remain protective of critical local industries.

To be sure, this more austere approach is likely to disappoint those hoping for substantial government incentives. The lack of substantial consumption-boosting measures in these recent policy announcements would sting for many market participants. However, one could argue that by curbing speculative excesses, China could better navigate the time of fiscal stress as economy slows while India could be laying the groundwork for more sustainable, stable economic growth – even if it comes at the expense of some immediate gratification.

Ultimately, the pivotal issue will be whether these policy shifts can strike the right balance between fiscal responsibilities and supporting the livelihoods of their citizens. Only time will tell if this approach pays off for the citizens of these economic powerhouses. Yet at least for the time being, the government bonds in both countries should provide an attractive risk/return trade off under the prudent fiscal policies.