Revival Or Survival - Four Sides Of The Great Corporate Tax Cut

Raman Swamy

India is dancing with joy.  The magic of bold reform has turned pessimism into optimism.   By slashing corporate taxes, Nirmala Sitharaman has revived the animal spirits of investors.  By making the big bang announcement during business hours, she has succeeded in boosting sentiments sky high.  There was a seven percent surge in the stock markets within a few hours which have increased the total value of India’s listed stocks by an astounding Rs 10 lakh crore.  All talk of recession has vanished.  India is back on track to fulfilling the dream of five-trillion-dollar economy. 

This is one point of view.   The other viewpoint goes something like this: 
This is just a gimmick.  Ordinary citizens earning ten lakh rupees have to pay 30% tax, but for companies making Rs 1000 crore profit the effective tax will be only 25 percent.  No wonder the stock markets are jumping for joy.  Cutting corporate tax rates less than three months after a Budget and four months before the next one is an act of desperation by a panic-stricken government.  After being in a state of virtual denial, they are making all sorts of short-sighted announcements to surrender to the demands of the affluent sections.   How will this boost demand? How will this benefit the common man? How will it ease agrarian distress?

It is well-known that there are “four Indias within India”.  The very rich, the very poor, those who are sandwiched in-between and those who just don’t fit into any category and don't matter anyhow. 

Right now, after Nirmala Sitharaman’s pre-Diwali gift to India Inc., the very rich are very happy.   Big businessmen and the investor community are almost delirious with excitement.  This is the bold reform we have been waiting for, they are saying. 

Here are a few of the most euphoric reactions:   
Diwali has arrived early! Very good move by a very good Finance Minister.  Howdy Nirmala! Your kindest cut of all in corporate tax will i) reignite corporate investment, ii) act like an elixir, iii) boost the stock market and iv) stabilize the rupee.  India has finally become a low-corporate tax economy.  Global investors will flock to India in droves.  Well done, well done.  Just look at Sensex soar, up 1,920 can you believe it. 

A well-known analyst said:   The ‘nabobs of negativity’ are shell-shocked.  They are tongue-tied, saying that the tax cut is only a supply-side measure and does nothing for the demand side.  They are wrong - lower tax always leads to more money in pocket and greater demand.  When the government is doing something to revive the economy from the recent slowdown, we should support it, not be blindly critical.

However, as the initial euphoria subsided the broader picture began to emerge.  The words of the sceptics seemed to have some merit. In her maiden budget in July, Nirmala Sitharaman had said that she had 10-year vision in mind.  Now within three months, she is performing a U-turn by rolling back most of her Budget provisions.  Is that indicative of pragmatic policy or just panic? Also, to be noted is that the reduced corporate tax is on profits – whereas the whole problem is that currently companies are struggling to make any profits.  

Simply by reducing corporate tax will not automatically lead to higher consumption of goods and services.  Consumers will not suddenly start buying cars, TV, houses, etc.  Money saved for companies will not put money into the hands of citizens.  

Bull runs on the stock markets are not evidence of an economic turnaround or a reversal of recessionary trends.  Today’s bulls will become tomorrow’s bears. 

A genuine demand and consumption push can only come if GST rates are brought down, drastically, and across the board, not just hotel rooms and electric vehicles. 

That is why some economists are cautioning against knee-jerk reactions and premature jubilation.   According to them, there should be no doubt in anybody's mind that the Indian economy is in the grip of an extremely serious crisis bordering on a recession. 

All the evidence, including even fudged official data, confirms that in almost all sectors of the economy, there is a big dip in demand leading to sizable cutbacks in production. This has resulted in fresh job losses on an unprecedented scale adding to the massive unemployment because of the disaster known as note-bandi.  

By providing tax relief to the business class, the fruits of whatever little growth has taken place is actually being passed on to a small minority of India’s super-rich.  Withdrawing tax surcharge on the wealthy smacks of a return to suit-boot sarkar priorities.  The increasing levels of inequality of income makes India one of the most unequal of societies in the world.

In essence, the reason why Indian economy is suffering from a significant shrinkage of domestic demand is because of the lack of purchasing power amongst the vast majority of the people. Unless people’s purchasing power increases, domestic demand cannot grow.  This can only be done by massive public investments in infrastructure, generating new jobs in a big way and thus increasing people’s purchasing power and domestic demand.

 Instead of doing this, the government is once again seeking to provide greater concessions for private capital in the fond hope that investment levels will grow and targeting the expansion of India’s exports - which the finance minister recently announced through a slew of measures costing over Rs. 70,000 crores. By targeting the realty and housing sectors, the government has once again turned oblivious to the fact that houses are not being purchased by the people simply because they lack the money to do so.  In the process, the government has abandoned its pledge to keep the fiscal deficit within reasonable limits. 

It is hard to say which side will be proved right in the coming months.  But one thing is for sure – the toiling classes will be waiting to see if there is a visible uptick in the economy in the near future.  

Having largely remained extraordinarily patient, meek and trusting even during the worst days of demonetisation trauma, the middle classes too are now beginning to get a bit edgy.  

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Sep 22, 2019

Raman Swamy [email protected]

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