Are Sitharaman’s corporate tax cuts enough to stop India’s economic slide?

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The Big Story: Damage control

From one angle, everything has finally changed. After months of denying that India even had an economic problem and weeks of attempting piecemeal solutions (as we discussed on the Political Fix two weeks ago), Finance Minister Nirmala Sitharaman finally made her big move.

Sitharaman last week announced measures that would normally have been presented in a Budget. Taxes on income for domestic companies have been brought down to 22% from 30%, which will mean that, inclusive of cesses and surcharges, they will now pay 25.17%.

Any new domestic company registered after October 1 that engages in manufacturing activity will have it even easier: they only have to pay 15% in income tax, with a total tax rate of 17.01%.

The above two rates only apply if companies do not avail of any of the myriad exemptions that India’s tax code features. Moreover, Sitharaman also rolled back a surcharge on capital gains on equity sales for Foreign Portfolio Investors that had been announced in the Budget a few months ago.

The announcements provided a huge jolt to the markets, sending shares skyrocketing and bringing much cheer to Indian companies amidst clear signs of an economic slowdown.

The new rates bring India much closer to the effective tax rates in other emerging markets, and below the threshold set in many developed countries. The hope is that the new rates, which should mean much better profit margins for lndian companies, will result in more investment and economic activity while also acting as an incentive against capital flight to other lower tax regimes. If any company has been sitting on funds, uncertain if it should add to its capital expenditure, the prospect of more cash to work with should hopefully change its mind.

More money spent would then mean a booster shot to an otherwise decelerating economy. Moreover, the approach – simplifying the tax rate, encouraging companies to give up exemptions – is the first step towards a much simpler tax code.

Problem solved, right? Well, the move has undoubtedly sent the message that Prime Minister Narendra Modi’s government has its eye on the problem and turned around the narrative just ahead of the prime minister’s important visit to the United States (including last night’s Howdy Modi gala with US President Donald Trump in attendance, more on that below).

But two major questions come up:

  • First, is something the government was up-front about: “The total revenue foregone for the reduction in corporate tax rate and other relief estimated at Rs. 1,45,000 crore.” In a year when the government’s tax collections are already severely below estimates, this move makes the maths even more difficult.
    India will most likely breach its fiscal deficit target, with all the negative implications of such a move, even if the finance ministry comes up with more creative arithmetic to hide the true numbers. Moreover, the government has cut the tax rate but not the cesses or surcharge, a move that states (which only get a share of the former) will see as unfair.
    Sitharaman has a fiscal, federal tightrope to walk.
  • Second, as per most diagnoses of the economy, the problem lies on the demand-side. Consumers do not feel confident enough to spend money, if indeed they have cash in their pockets. This tax cut is aimed at the supply-side, giving companies more money to make things.
    How will that solve the demand problem? The long answer is a version of the trickle-down effect that sees companies investing, and eventually putting cash in people’s pockets that gives them the confidence to buy more consumer goods.
    The short answer may be that the government needed to change the mood of those in business, who might be tempted to not invest or move their money out of India, and so focused on that constituency first. But since demand is not expressly addressed, there is the fear that companies might just choose to sit on the extra cash in their hands because of the tax cut instead of spending it.

This is where the politics of this move come up. Prime Minister Modi’s first big policy move in his first term was an attempt to make it easier for companies to acquire land in India. Faced with protests and an Opposition that accused him of privileging corporations over ordinary people, Modi had to roll back the decision.

This time around, Modi’s first major move was in Kashmir, setting the tone for a tenure where political and cultural aims will take precedence over economic or policy ones. But the combination of a major electoral mandate and the “success” in Kashmir, may have meant that the government is less worried about giving a huge handout to corporate India.

Still, it is an approach fraught with danger if demand doesn’t revive and Modi is seen as helping out big business over ordinary people. The question that comes up is this: Does Modi believe his political position right now is so unassailable that a move like this will simply be accepted? Or does the government (with no fiscal space at all) have more announcements in store that will focus on ordinary people?

Catch-up

Kashmir is still under lock down. It has been 50 days now. Last week, more than 500 academics and scientists issued a statement calling for an end to the curfew. The government meanwhile, continues to insist that people support the move, even if they can’t actually come out and say so.

Prime Minister Modi and US President Donald Trump shared a stage in Houston, Texas. The “Howdy, Modi” event saw the rare coming together of two major political leaders at a public rally, both effectively giving campaign speeches to the 50,000-strong audience of mostly Indian Americans. Trump had to sit through a long speech from Modi, in which he insisted that “everything is fine” in India. But, with a grueling re-election campaign ahead, Trump also may have been pleased to hear a foreign leader say “Ab ki Baar, Trump Sarkar” (It’s Trump’s turn now) to a huge, supportive non-white audience. Modi is in the US for the rest of the week, as the United Nations General Assembly gets going.

Both Maharashtra and Haryana will go to the polls on October 21. The model code is now in effect and counting will be on October 24, three days ahead of Diwali. We looked at the field in Maharashtra in last week’s Political Fix.

The Right continues to use the “JNU formula” to try and polarise other institutions, in this case Kolkata’s Jadavpur University. A seminar by a right-wing student group on campus turned into a fracas, and a subsequent angry phone call from a Union Minister to The Telegraph newspaper.

Bahujan Samaj Party leader Mayawati took on the Congress after all of her Assembly leaders in Rajasthan switched over to the party. “Instead of weakening communal forces, the Congress party is engaged in weakening the forces raising their voice against it,” she said.

Reports and Op-eds

Even the immensely popular Indira Gandhi was eventually felled by bad economic management. Shekhar Gupta says the tax cut is, more than anything, a panicky “loss of nerve” for the Modi government.

Modi has received much advice on what the government can and should have done to address structural problems in the economy. Whose fault, asks Puja Mehra, is it that he has not listened to any of that advice?

The simple fact is that Hindi is not a language that fetches economic gains. If it were, South Indians would take to the language without it needing to be imposed, writes Shruti Rajagopalan.

The war on single-use plastic could upend entire economies and affect millions in India. Sayantan Bera and Suneera Tandon report on how it is not as simple as fighting pollution when people’s livelihoods are at stake.

India thinks it has won in Kashmir, but is it gutting its own democracy in the process? Pratap Bhanu Mehta asks if the country and its leaders know what forces they have unleashed.

Can’t make this up

We told you last week about the new traffic fines that have made people upset, led to some protests and states diluting the penalties. In Gujarat, News18 managed to find one commuter who got out of a hefty fine for not wearing a helmet. Zakir Mamon, in Chhota Udepur district, managed to convince police not to penalise him because his head is too big for any standard-size helmets. “I have visited all the shops which sell helmets but could not find any helmet which can fit onto my head… I have told the police about my unique problem.” (Yes, there is a picture).

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