Why FPI’s will exit EMs in 2017

The dollar is supreme and the only giant sucking sound, we have heard so far, is of money going back to the United States and that is something which doesn’t bode well for flows to emerging markets, but there is more fundamental problem out here which is the emerging market growth model is sort of under serious question and this is what is going back to my earlier point about Trump presidency with two changes that they are going to make or are very serious about making.

One of them will pass for sure, the other one, I am not sure but this has major implications for India. Take the first thing that they are going to reduce the corporate tax rate, from 35 or something that they are talking about to 15 or 20 percent, this is huge because here is the largest market in the world which is reducing its corporate tax rate from 35; effective it is a bit lower but 35 is the top rate down to 15-20 or something, that is huge because why would anyone invest outside their domestic market and it is so large, when the corporate tax rate is being brought down so dramatically.

The second is much more controversial but with even greater implications for India which is that they are discussing something called destination tax. The destination tax implication is that exports are going to be tax-free and imports are going to be taxed – that’s a very crude way of putting it but that is what they are talking about. If that were to go through – that would mean the entire outsourcing model to emerging markets or even exporting your way to prosperity model which is how many emerging markets have grown rapidly, Korea, Taiwan, China – that model is going to be seriously impaired.

said Ruchir Sharma

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