The Indian economy needed a booster shot. Was Nirmala Sitharaman’s corporate tax cut the way to do it?

On the face of it, Finance Minister Nirmala Sitharaman’s announcement to cut the corporate tax rates in India from 30 to 25 per cent, making for an effective slab of 25.17 per cent for all companies in India that do not use incentives, is a smart move, both for the corporate sector and the optics of politics. This avoids any potential conflict with sector-specific reductions in Goods and Services Tax (GST) rates, which would have led to a showdown in the GST Council. By cutting a Central tax, a decision solely of the Central Government, days of headache have been avoided. Of course, Opposition politicians will make a fuss about these rates but the smarter among them will understand that not only did something need to be done but that the private sector was essential for creating employment and the challenges thereof might potentially be reduced. Now, how the tax cuts will be utilised could determine how they benefit the economy. Companies could use the extra cash to fund expansion, pare debt or even not reduce their workforces in what has been a difficult year. That said, the reduction in corporate tax rates would also be extremely beneficial for potential foreign investors who might have shied away from India due to higher rates and could, therefore, give a boost to the ‘Make in India’ initiative. This shows that the Government is not just taking half-hearted selective measures to revive the economy but is actually taking matters seriously.

The prime disappointment though has been felt by middle-class income tax payers, who were also hoping for some adjustments in personal income tax rates that remain relatively high. While the after-effect of demonetisation and the GST rollout, both of which brought in a lot of the informal economy into the formal scheme, was an increase in the overall tax base, there have been no commensurate rate reductions. The investing classes are still peeved about long-term capital gains tax on money market investments and any reduction in these will excite the markets once again. The problem is that while this might have given the bourses a booster shot, it could take several quarters for the effects to really start taking hold of the economy. In the short-term, consumer sentiment might take a while to recover. And that is worrisome. With companies already stressed, some feel that the rate cut will be absorbed in the near-term by firms balancing their books. While there could be some concerns and some cribs, there should be no doubt that the measures taken by the Government are on the whole an extremely positive given the overall state of the economy, and could even improve collections in the long-run once investments increase. If companies pare their debts, it could encourage the banks to start lending more. Increased investments could spur job creation as well. Yes, the Government has huge social responsibilities but the best way to help people is to create jobs and India’s challenge on that front is unparalleled. This will help. However, this looks more like a distress management module rather than embodying a vision of either long-term goals, structural or big bang reforms that will take us to the next level irrespective of market trends and crisis. If only, this gives credence to the idea that no Government really changes the status quo unless it is forced to by the scale of an economic crisis. This is a repeat of the scenario in 1991 when the then Finance Minister Manmohan Singh liberalised the economy in the face of an unprecedented crisis. India’s economy cannot afford to be reactive anymore, it has to be proactive.