After having been in denial mode for months, the government with its substantive cut in corporate tax, publicly admitted, through belatedly, what was widely known and experienced about the sluggish economy. The audacious tax cut, that was effected last month, was apparently done in the hope that it would kick-start the sagging economy. By bringing down corporate tax to the global level, the government has undoubtedly sent a strong and positive message which has cheered the stock market and hit the media headlines globally.
Though the immediate tax bonanza would boost the bottom lines of only Indian corporates, its message to foreign investors too was positive. Against the backdrop of China losing its sheen as a preferred global investment destination, the prospects of attracting sizeable foreign capital investment in the Indian economy are indeed brighter than ever before especially in the context of the trade war between China and the United States.
Describing the corporate tax cut as historic, the Prime Minister said it would give a stimulus to the ‘Make in India’ campaign, attract private investment from across the globe, improve the competitiveness of India’s private sector, create more jobs, and result in a win-win situation for the 130 crore Indians. The country’s corporate honchos and the stock market loudly echoed the sentiments of the Prime Minister and cheered the government’s move.
For an economy raring to become a $5-trillion one by 2025, sacrifice of tax revenue of a lakh-and-a-half crore rupees in favour of the corporate sector could be justified politically and economically, provided it realises the ambitious expectations spelt out by the Prime Minister. But as euphoria over the unprecedented step is evaporating, it is time to closely look at its possible impact both in the immediate and the long term in the context of the current sluggishness in the economy.
Action, reaction and reality
By now it is widely accepted that the slump in demand for industrial and consumer goods that range from heavy equipment to automobiles to soaps and biscuits have starkly reflected the reality of a slowdown. The government woke up to this reality, though belatedly, and swallowing its earlier dubious explanations such as changing consumer preferences and the like for the downturn in demand, injected with alacrity a massive dose of adrenalin in the body corporate hoping that it would release the animal spirit in the economy. The capital market was enthused, the Sensex soared and corporates exuded confidence. Now the million dollar question is whether the revival of the animal spirit would spur an increase in capital investment either for expansion of existing operations or for the launch of green field projects.
Regrettably, the prospects are bleak for the same reasons on account of which the economy slumped in the first instance — lack of demand that was evident in the market for quite some time. For obvious reasons, higher levels of surplus income with corporates will not necessarily translate into a higher level of investment and a consequent spurt in economic growth. A high level of demand for products and services is the sine qua non of higher levels of investment and consequent economic growth.
Agriculture and allied sectors and micro, small and medium enterprises (MSMEs) — not corporates — are still the strongest drivers of our economy. Agriculture and allied sectors which not only contribute to our food security but to approximately over 50% employment have been on the decline in spite of several ad hoc policy pronouncements to revive them. At the same time, MSMEs suffering for a long time on account of institutional constraints including inadequate and timely availability of credit were crippled after demonetisation.
Some recommendations
The report of the expert committee on MSMEs that was set up by the Reserve Bank of India has made significant recommendations. These include constituting a government-sponsored “fund of funds” to support venture capital funds and a credit guarantee fund which would go a long way in enabling their growth. Employment generation has been dismally low and unemployment has reached an all time high despite the government’s feeble protestations to the contrary. These are issues that are fundamental to the economy, and without addressing them directly and systematically, expecting higher levels of growth is patently unrealistic. The latest reports of Moody’s, the International Monetary Fund and the Asian Development Bank confirm this gloomy assessment.
Reinvigorating the National Rural Employment Guarantee Programme, and making it demand-driven as originally envisaged could be a concrete and immediate step to generate greater purchasing power in the hands of the people to accelerate demand and consumption, especially in the rural areas. Higher levels of public spending for creating much-needed infrastructure in several sectors would not only generate employment but also create productive assets. For instance, spending on buildings, roads, bridges, schools, hospitals and waterbodies would have multiple benefits to the economy. Well-calibrated policy interventions and targeted incentives to select industries specially with high export potential would push MSMEs to a higher growth trajectory.
If speedily and efficiently implemented, these mundane measures could pull the sagging economy out of the quagmire, especially in the near term, and hopefully incentivise and facilitate the much anticipated spurt in corporate investment which apparently the government was aiming at while announcing the tax bonanza.
T.K.A. Nair was Principal Secretary and Adviser to former Prime Minister, Manmohan Singh
