A Really Big Stimulus to Revive COUNTRY's Economic Growth
The economic environment in India has been challenging for some time now. The growth slowdown has been sharp, much worse than expected, and the recent drone attack on Saudi oil installation and the consequent worsening of the geo-political situation in West Asia has emerged as another headwind for the economy and markets.
Challenging environment calls for bold reforms. This was precisely what Finance Minister Nirmala Sitharaman delivered on September 20. The cut in corporate tax rates and MAT and the new manufacturing tax rate came as an unexpected shot in the arm for the economy and markets. Sensex and Nifty responded with spectacular rallies of 1921 and 529 points respectively – the best during the last 10 years.
The major factor that pushed India’s GDP growth rate to a six-year low was the decline in private investment, which has been declining steadily during the last six years. The corporate tax cuts announced, along with the monetary stimulus already provided by the RBI, have the potential to trigger the animal spirits and revive investment and economic growth. The 22 per cent corporate tax rate (25.17 per cent effective rate, including all cesses and surcharges) makes our tax rates competitive and in tune with most emerging markets and our Asian peers. The new tax rate of 15 per cent for new manufacturers can attract fresh investment and give a big boost to ‘Make in India’. The reduction in MAT is welcome. These tax cuts will leave more money with the corporate for investment and remove the negative image of India as the nation with the highest corporate tax rate. The psychological boost from these bold reforms will be significant.
The market has given a big thumbs up to the reforms, which can be described as the most path-breaking and reformative step after Manmohan Singh’s game-changing budget of 1991. The benchmark indices Nifty and Sensex have delivered the best single-day gain of the last 10 years. The ‘wealth effect’ of the market gains can also contribute to stimulating demand. From the capital market perspective, the announcement that the enhanced surcharge will not apply to capital gains on sale of equity, derivatives or equity-oriented funds and the removal of tax on buybacks for those companies which made the announcement before July 5 this year are clear positives.
The stimulus size is quite big since the revenue foregone is expected to be Rs. 1.45 lakh crore. This, along with the Rs. 20,000-crore package for the real estate sector, has the potential to pump-prime the economy. Of course, there will be a revenue shortfall and the consequent strain on the fisc. But the expected expansion of economic activity can partly compensate for the revenue shortfall. The fiscal slippage is a risk worth taking. Fortune favours the brave!
These bold reforms, along with the monetary stimulus provided by the RBI, the relief package to the automobile and real estate sectors and the rural uplift expected from the good monsoon have the potential to kick start the economy and push it to higher growth.
Of course, the external environment needs to be keenly watched. The fact that 20 central banks have cut rates this year is an indication of the challenging global economic environment. Escalation of the geo-political tension in West Asia is another area of concern.