Nirmala, Right or Wrong?

Union Finance Minister Nirmala Sitharaman’s announcement on Friday to slash corporate tax rate for domestic companies from 30% to 22%, and proposing a competitive 15% rate for new investment in manufacturing, has not come as a surprise, especially given the slowdown the Indian economy has witnessed in the recent months. Sitharaman, and for that matter the BJP-led government headed by Narendra Modi, is thus not only aiming to lift business sentiment and spur investments, but look much beyond. Nirmala, who had a successful stint as Defence Minister in the first Modi government, has also offered a Rs 1.45 lakh crore fiscal boost, thus sending a strong signal that this government would take all steps needed to revive growth. India’s GDP growth rate had seriously slowed down to 5 per cent in the first quarter of 2019-20 and is expected to be around 6 per cent or below at the end of this financial year. As a former Reserve Bank governor has recently mentioned, there has been a combination of cyclical and structural factors that are responsible for the current slowdown. One oft-cited example is the auto sector. While there appears to be a collapse of aggregate demand for automobile in the economy, global uncertainties have only added to the problem. Moreover, as both critics and supporters of the government have begun ringing alarm bells, the government, in the last few weeks, has announced a number of measures to improve both consumption and investment in different sectors and for the economy as a whole. Friday’s announcement of reduction in corporate tax rates announced could thus play a major role in reviving the sentiments of the private sector. But then, the tax revenue may also decline, which in turn may put pressure on the overall fiscal deficit. Experts reacting quickly to Friday’s announcement meanwhile have said that stimulus and structural measures and monetary policy may help reviving the economy to some extent in the near future. But, these measures in isolation may not be enough to help in getting higher growth. Going by what experts both within and outside have pointed out, and rightly so, the government at the moment needs to focus on three structural issues – physical infrastructure development, raising human capital and revival of rural economy – for a long-term growth of 7 to 8 per cent. Over and above these, the government has also set a target of making India a $5-trillion economy by 2024. Thus, there is an urgent need of also taking specific care of both cyclical and structural factors in the present context. This Sitharaman can probably do by taking care that not much is compromised on fiscal deficit targets. Some other measures that experts have suggested include disinvestment, reducing non-merit subsidies, removing exemptions, increasing tax base and shifting from revenue to capital expenditures are some of the measures for raising government investment. That things are not as gloomy as the critics of this government have been trying to project has been evident from the fact that the BSE benchmark Sensex on Friday notched up its biggest single-day gain in a decade, as sentiment boost and potential impact on investments overshadowed fiscal concerns. There is a clear ray of hope, and Sitharaman can probably assure the people that things are not as bad as has been projected.

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