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Modi's Tax Cut Gamble Pits Growth Hopes Against Possible Fiscal Pain

3 22 0

Prime Minister Narendra Modi has always been very cautious about giving away too much tax concessions to Corporate India lest the “Suit Boot ki Sarkar” image came back to haunt his government.

In fact, India Inc had almost given up on possible cuts after Nirmala Sitharman’s first budget. Then what explains the mega corporate tax cut announced on Friday, which sent stock markets soaring and made industry captains describe it as the biggest tax reform in decades?

Two recent events forced the government’s hands. One, the unexpected decline in quarterly GDP growth which some economists say is no more than 4%, even if official figures put it at 5%.

Two, the prolonged global trade war and sudden downward forecast for global growth.

The Modi government knows that business sentiment has been going into a deep downward spiral and that markets were reflecting it on a daily basis. About 60% of the 3,000 stocks listed on the BSE have fallen by over 50% in value in recent years. Even Modi supporters within Mumbai’s financial community had said that such wealth destruction has not been seen in 40 years.

So, Friday’s tax cut was Sitharaman’s big gamble to revive confidence and get some immediate earnings injected into corporate balance sheets. For sure, the new tax rates now put India on par with its East Asian peers to attract fresh investment. Modi can also now tell Donald Trump that India has corporate tax rates comparable with that of the US. Global investors seeking to shift their production post the trade war will look at India seriously.

Union finance minister Nirmala Sitharaman presents the Union Budget 2019-20 at the Lok Sabha on July 5. Photo: PTI

However, there are huge risks in terms of how long these tax cuts take to revive the investment cycle to produce higher growth and employment. In the short run, there is a huge risk to the fisc which has already gone haywire. Direct tax and GST collections reveal a possible shortfall of the order which had occurred in 2018-19 — about 1% of GDP. One doesn’t know how global rating agencies will see the short-term development, even if investment sentiment revives.

Taking a step back, consumer demand will not revive until rural wages grow. Even urban wages had........

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