What the tax cut will achieve; what it won’t
There are positives. But India needs to do more on education, tech, exports, informal sector and farming
Our economy is demand-driven. To achieve 8% of Gross Domestic Product (GDP) growth, India needs to spur demand. This can only happen by increasing the earnings of the 800 million Indians who presently survive on ₹10,000 per month.
Before November 8, 2016, the economy was moving in the right direction. The decision to demonetise paralysed it. Growth fell every quarter. That downward spiral continues, and may continue for some time. The folly of demonetisation was compounded by the imposition of an ill-structured multi-rate Goods and Services Tax (GST). Businesses required time to adjust to this paradigm shift. Small and medium-size entrepreneurs were unable to adjust to the complexity of the GST framework. It disturbed the nation’s economic equilibrium. Added to these were the economic consequences of ill-conceived majoritarian decisions disrupting lives of people. The lynching of Dalits, politics underlying the cow, the architecture of the National Register of Citizens coupled with the decision to amend Article 370, have destroyed livelihoods across different relevant geographies.
The result: Revenue earnings have gone down. The collections under GST have not matched expectations. Resources have dried up, negatively impacting the implementation of socially beneficial measures.
Former finance minister Arun Jaitley had committed to reduce corporate tax rates to 25%, but not as a one-time measure. That commitment remained unfulfilled because of revenue constraints. The rationale was that reducing rates will make industry globally competitive. In that regard, this year’s budget was found wanting. Given that in the last quarter, the GDP growth rate came down to 5%, the government needed to urgently address industry’s concerns.
Prime Minister Narendra Modi’s visit to the United States (US) provided the opportunity for some good news for industry to celebrate Howdy Modi. The diplomatic task ahead is persuading US President Donald Trump to revise his decision to exclude India from the Generalized System of Preferences list.
The president, in turn, will seek tariff concessions on US products exported to India, especially medical devices and agricultural products. He will also be looking at India easing restrictions on e-commerce platforms provided by companies like Amazon; removing impediments in relation to content on Facebook, Google, WhatsApp and others; and the possible consequential liabilities arising therefrom. The broad contours of a bilateral trade agreement may well be in the offing. With interest rates reaching zero levels in the US, its industry will welcome increased investment opportunities in India.
There are clear positives to the Diwali gift of corporate tax cuts from the government. Before this bonanza, industry with exemptions paid more than 25% corporate tax. With reduced tax rates, our industry hopes to be globally competitive. Increased earnings will result in increased capital expenditure, and will expand production capacities. That will allow for greater investment in research and development. The reduction in corporate tax rate to 15% for green field manufacturing projects — set up on or after October 1, 2019 and commencing production by March 2023 — will further incentivise investments. Given that the 15% corporate tax will apply to industries set up in Special Economic Zones (SEZs), domestic industry having invested in SEZs may avail of the benefit. This may increase the volume of exports stagnating for last several years.
Apart from shrinking capital for investment, industry was unable to source skilled manpower to meet its requirements. What is needed now are policy interventions for effecting structural changes in our skill development programmes, which, in turn, require a paradigm shift in imparting education. Without adequate skilled manpower, reducing tax rates will not be enough to help the manufacturing sector. Then, there are technological challenges such as Artificial Intelligence (AI), automation and 3D design which will likely bring about a paradigm shift in the process of manufacturing goods. These are global technologies. Indian industry must absorb them to be competitive at the international stage. The process would mean a loss of jobs, along with frequent lay-offs. While industry will benefit from lower corporate tax, revving up exports will be difficult in the short term. Unless exports grow at a rate of 15-20% annually, there is no possibility of the economy achieving 8% GDP.
Annually, 18 million young people enter the job market. Assuming that 50% of them will get employed, with the present rate of growth even with tax breaks, it is unlikely the economy will be able to absorb such numbers. So, in the next few years, unemployment will be on the rise, and this will reduce the wages of those who are employed. This, in turn, will reduce incomes and subdue demand.
Reduction in corporate tax has no benefit for those in the informal sector and the farming community.
This government had to do something. Like demonetisation and the ill-conceived GST, this decision, which has resulted in a sudden boom in the stock market, is not likely to impact the aam aadmi. Growth will continue to decline as long as government chooses not to address the real problems confronting the economy. An inept doctor, we know, can seldom prescribe the right medicine.