Without This Two-Step Plan, Corporate Tax Cuts Will Have a Limited Impact
Exactly two weeks after the dramatic tax cuts of 20 September 2019, the mood has turned sombre once again. On that day, finance minister Nirmala Sitharaman announced sharp cuts in corporate taxes, which will benefit only a handful of big tax-payers. 
 
After the announcement and excited stock market had pushed the Sensex up by 5.3% on Friday (20th September) and 2.8% the following Monday. The real impact has been psychological. The deep belief of businessmen and investors in the regime was restored. But bad news continues to come and the market has given up a lot of the outsize two-day gains.
 
Since 2014, businessmen and investors have fervently believed that the Bharatiya Janata Party (BJP) government, led by Mr Modi knew exactly what to do and were working according to a plan to accelerate growth. It is quite another matter that the government has just never explained what its economic philosophy is, and so, what kind of reforms we can expect.
 
What we got as “reforms” was the destruction of demonetisation and enormous pain inflicted by the shoddy implementation of the goods and services tax (GST).
 
But businessmen and investors, who are a naturally optimistic bunch, took all this pain in their stride because they believed in the PM Modi’s desire and ability to deliver. This is why just before the union Budget in July, the market hit an all-time high, as investors looked for a ground-breaking budget. 
 
After all, PM Modi had created history by winning a massive popular mandate for the second successive time and nothing stopped him from unleashing “big bang reforms”.
 
However, over the last few months, every economic indicator has been flashing red – a result of no economic philosophy and so, no effective reforms. No wonder that rising unemployment, poor export growth, punitive taxes, tax terrorism, imploding public sector, collapse in the gross domestic product (GDP) growth rate to 5% (effectively 3.5% under the old calculations) in the first quarter, auto sales at a 20-year low, no manufacturing growth, crisis in financial services and banking were staring at our face. 
 
Dr Rathin Roy, till recently a member of the Prime Minister’s Economic Advisory Council (EAC), commented that we are facing a silent crisis.  After this frank talk and raising questions about government’s budget figures, which seem to be at variance with the figures of Comptroller and Auditor General (CAG), he was removed from the EAC.
 
But just when were seemed to slide down inexorably down a slippery slope, the government announced huge tax cuts and the belief in PM Modi was restored again. Businessmen and investors are now expectantly waiting for the next round of big bang reforms. What could these be?
 
Sustained economic success stories from around the world clearly tell us what works. We need higher productivity of land, labour and capital. This in turn can be delivered by two important engines: 
 
1. A true market economy, with both incentives and competition to businesses. 
 
2. A regulatory, governance and justice system that encourages good guys and penalizes the bad buys. 
 
There is no other proven method of durable economic progress. 
 
The much-hailed liberalisation of early 1990s failed to fire either of the two engines, which is why we had corruption, bad loans and inflation from which the economy took a decade to recover. On top of this, we got crony capitalism under the successive governments.
 
India may have gone up in the World Bank ranking of “Doing Business” but the reality on the ground is that we dozens of permissions are required to start a business; running it involves bribes and extortion; and shutting them down is tough. 
 
The second aspect – speedy and fair governance, regulatory and justice system – is not in place either. The central bank has repeatedly failed to supervise banks and finance companies, sectoral regulators are bumbling and dealing with courts and revenue authorities is a nightmare. The government remains the largest litigant. 
 
Poor climate of doing business and governance system is the reason various markers of the economy today are worse than in late 2013, when a despondent India, tired of corruption, crony capitalism and policy paralysis, pinned their hopes and faith in Mr Modi. 
 
Any policy change, to be really effective, must be part of the two steps outlined above. Otherwise they will not have only a temporary and limited effect. Tax cuts did not flow from an overall plan to bring about these two basic changes. Welcome as they are, they were a knee-jerk action to a gloomy economic scenario that is getting a lot of attention suddenly. 
 
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Comments
Ramesh Poapt
3 years ago
many are worried aboutGDP. it will well improve in Q4
Suketu Shah
3 years ago
Anurag Thakur seems to be right hand man of FM.What does he know about finance,economics,etc,All unsuitable people in major posts leading to disaster.
Aditya G
3 years ago
Completely agree. I'm all for free market capitalism, but with some safeguards for the poor. It's going to very difficult to balance the two. My view is that the bureaucratic system has to be overhauled, streamlined by shedding all the fat and inefficiencies within. It's a major hurdle to reforms.
Ranbir Lamba
3 years ago
Already posted that
It will go to running corporate
Reduce GST & IT slabs + corporate to slash prices by 49that% of this corporate tax. All were recommended on day of corporate tax rate cut. Need to generate demand . Pay DA also we'd jul to employees for consumption
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