Overdue corporate tax cuts for India Inc. finally arrive
Throughout my previous pieces on the Indian economy, I have always noted manufacturing as the pivotal sector that will push Indian growth story by leaps and bounds. And as Finance Minister of India started reciting the various measures in terms of tax cuts for corporates at a press conference yesterday, it was clear that this was an audacious move. It was unprecedented, and mind you, markets did not anticipate what was in store for Friday. Sensex was up by around 5% by noon. Moreover, India’s currency, the rupee, also rose around 0.5% against the US dollar as the market bells rang to signal close of trading. The long-term implications and the transition of the tax cuts to “on the ground disposable income” remains to be analyzed, but the foregone fiscal deficit advantage of around 20 Billion dollars (effectively) remains to be on the agenda for the government to tackle. Hopefully, spending can be curbed over the next couple of quarters to ensure fiscal deficit remains manageable.
Economists around the globe have the same insight into tax cuts — more investment, more jobs and ergo more economic activity. For decades, the Indian government was cash-strapped and could not even think of foregoing the moolah through corporate taxes, after all business should be regulated and contained. But the measures put in place to increase tax base has made it possible for India to let go of federal revenue in lieu of the global slowdown. A global slowdown that is caused by various geo-political issues. However, the stimulus package introduced yesterday will help provide interim relief, the steps can be summarized as following,
- Lower corporate tax rate — 22% from 30% for companies that don’t seek additional exemptions (accelerated depreciation for instance)
- Firms that do receive incentives or exemptions will see their tax rate cut to 25% from 35%
- New manufacturing firms will see their corporate tax rate lowered to 15% from the current base of 25%
- The super-rich tax will not apply on capital gains arising from the sale of any security including derivatives in hands of foreign portfolio investors (FPIs)
These measures along with repo rate cut introduced by the RBI will provide the impetus to attract investors to the country. Investors who pulled their investments over the past few months due to stringent tax rates, which somewhat capped revenue for the corporates, who needed that nudge to return and I am certain they will, given the new reforms. Tax rates aside, the regulations over foreign investments that prevented investments were also relaxed. Further, we all agree that banking needs overhauling to relieve the strain from all the bad debts accumulated, however, RBI hinted yesterday at a further relaxation of about 25 basis points by end of the calendar year. And needless to say, at a time when posturing in itself can provide relief, the coordinated dance of Reserve Bank and the government seems to be the need of the hour and they are delivering. Mr. Das also praised the government for the bold move, given the uncertainty around the alternative revenue sources to make up for the tax cuts. However, a long overdue and positive move by the finance ministry will fillip investments and jobs in the country.
But the larger question still remains and looms large, how do we arrest the slowdowns caused by over-producing and over-stocking companies across India. How do we communicate to the populous that macroeconomics is more than revenue and profits. The financial ecosystem has long remained fragile, with butterfly effect being significantly visible. Indian corporates and manufacturing facilities remain dependent on smaller contracting companies for various aspects of production, and how do we save these smaller production facilities. For, at the end of the day, larger production facilities will survive, but the brunt of a slowing economy and demand will only lead to larger stress on the facilities lower in the food-chain. Economists would call it the survival of the fittest, we do need a change in the paradigm. Even the citizens of the country are significant stakeholders in the economy, given how when spending reduces, the economy turns bullish. Hopefully, the reforms introduced yesterday, will result in more disposable income, and more money to be spent. And of course we will not see the benefit in the short-term, but long-term projections seem favourable. And in conclusion, India Inc. would also hope that banks can continue lending to small businesses and retail borrowers, to spur spending, given the festive period looming, if we are to meet the GDP growth targets set out.
