Lowering corporate tax rate is good but not enough -Renu Kohli
While the corporate tax cuts are a long-term positive, this does not dismiss the case for near-term consumption support
The government relented on fiscal discipline to steeply reduce corporate taxes on September 20; the lowest is now 17 per cent for new manufacturing units. The stock market soared, seeing earnings grow after successive downgrades for nearly nine years — about the same time as the investment shortfall that lower taxes intend to reverse. Sentiments have lifted and the expected positive impact upon medium-term growth has tempered pessimism; investors had begun to speculate if India would grow at 5-6 per cent henceforth. Lower corporate taxes have been largely welcomed. However, many argue fiscal support should have targeted the consumption shortfall: if buyers’ incomes and spending are depressed, this will constrain investment demand; therefore, lowering income taxes might have been the better policy choice.
These arguments are not invalid. It is true that business tax incentives will take time to reflect in higher investment and growth, require complementary changes, and are not independent of demand conditions, within or outside. Nonetheless, these are in the right direction and, indeed, should have come a few years ago, around 2015-16, so as to exploit the oil-revenues’ windfall and enable firms to pick up the Chinese manufacturing slack.
Please click here to read more.