It was a fitting image. Days after his finance minister announced a surprise $20bn corporate tax cut last month, India’s prime minister Narendra Modi strolled on to a stage in Houston with none other than the US’s own tax cutter-in-chief.

Awash with praise both at home and abroad for the reform, the raucous “Howdy Modi” rally alongside Donald Trump was a triumphant moment for the Indian premier.

The convenient timing of the sortie even prompted the embittered opposition politician Rahul Gandhi to snipe that the rally was “the world's most expensive event, ever!”

Nirmala Sitharaman, India’s finance minister, had caught markets on the hop by lowering corporate taxes from an effective rate of around 35 per cent to 25 per cent, with a special 17 per cent tariff for newly created manufacturing companies.

Indian stocks jumped as if Ms Sitharaman had stabbed them with an adrenaline shot. The Bombay Stock Exchange’s Sensex index closed 5 per cent higher following the announcement, the biggest one-day move in a decade, and pushed higher still on the next trading day.

Some of that was relief. Gross domestic product growth had slowed to a six-year low, at 5 per cent year-on-year between April and June, which was quite a comedown for a large economy celebrated until recently as the world’s fastest-growing. Traders had been made miserable by a months-long decline in equities.

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Hence the jubilance among executives and investors who celebrated the tax cut as a masterstroke — “This is the best move ever,” said one pharmaceutical CEO — that would help drag India’s stock market and the wider economy out of a rut.

But the experience of the US, which lowered its corporate tax rate from 35 to 21 per cent in December 2017, offers a somewhat underwhelming parallel about the lasting effects of such a move. Since its January 2018 peak, the S&P 500 equity index is up only another 5 per cent, with big falls in the interim.

Business confidence has faltered, as concerns have grown about the trade war with China and its potentially destructive effect on the global economy. This is reflected by a sustained slide in the Business Roundtable’s CEO Economic Outlook Index.

There are of course enormous differences, not least that the US appeared to be at the peak of a cycle as its cut took effect, while India is chugging along at what many hope will be the bottom. But with the initial sugar high over, Indian investors are left to consider a more sombre picture.

“The first 48 to 72 hours was an immediate reaction, [like] when you say to someone, ‘Hey, I’ve got a bag of goodies,’” said Nitin Bhasin, head of research at brokerage Ambit Capital. “Now the market is adjusting to the reality.”

That reality is a domestic — and global — economy facing big obstacles. India’s financial system has faced a reckoning since AAA-rated infrastructure lender IL&FS collapsed last year, sparking fears of contagion. Both public and private lenders have built up alarming piles of bad loans, adding to sector nerves. The collapse of IL&FS led to a funding squeeze across India’s lenders, with the central bank forced to take over a co-operative bank last month.

Investors in India also have to contend with slowing growth beyond the country’s borders. While the relatively introverted South Asian economy is better shielded from global headwinds than other emerging markets, a fifth of GDP comes from gross exports, according to investment bank Morgan Stanley. That leaves equity investors with plenty to lose if the world enters a recession.

Edelweiss, a local broker, initially estimated an 8 to 10 per cent boost to corporate earnings from the tax cut, but revised its range down to 1 to 3 per cent in light of concerns about the economy — in addition to the fact that some businesses are expected not to opt not to switch over to the new rates straight away.

Capital Economics, meanwhile, expects the Sensex to end the year at 37,500 — higher than its level before the tax cut was announced, but down around 4 per cent from current levels. “We think the rally in local equities will be shortlived,” it said, adding that it thought Indian stocks would nonetheless do better than in other emerging markets.

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The key, investors say, is patience. The tax cut brings India’s corporate rate in line with other emerging markets, leaving the country better poised to pick up manufacturers fleeing tariffs levied as part of the US-China trade dispute.

The extra cash could mean extra investment, and herald further reforms. “This is a large transfer from the public sector to the private sector,” said one Mumbai-based analyst.

That is why India-watchers say investors would be wise to stick around. “The euphoria seems to have gone away,” said Prabodh Agrawal, chief financial officer of IIFL, a financial group. “But the long-term benefits will be there.”

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