Tax breaks necessary but India needs more reforms, says CEA
- CEA Subramanian says reforms are required to further unleash the entrepreneurial spirit of Indians
- CEA said the country needs more reforms to enhance productivity in the economy
Corporate tax rate cuts are necessary but not sufficient to stimulate investments, for which the country needs more reforms, chief economic advisor (CEA) Krishnamurthy Subramanian said on Tuesday.
The CEA said that corporate tax cuts were announced to make India attractive for investors in the face of competition from Thailand, Vietnam and China. “Tax rate cuts are necessary, but are not necessarily sufficient conditions for attracting investments because investors look at after-tax returns,” Subramanian said while arguing for more investments.
The government in September announced a lower 22% corporate tax rate for domestic companies that do not avail of any tax breaks and a 15% rate for new manufacturing companies.
“We do need more reforms to enhance productivity in the economy, what economists call the incremental capital output ratio, which is about how many units of capital one needs to bring in to produce one unit of output. That is something that is dependent on reforms. The steps being taken are articulating this vision that we need reforms to unshackle the entrepreneurial spirit of the country,” Subramanian said at a conference on education organized by the Federation of Indian Chambers of Commerce and Industry in the capital. He said the government reforms being undertaken are with a vision “with private investment at its core”.
The CEA said reforms are required to further unleash the entrepreneurial spirit of Indians and attributed the current economic slowdown in the country to a decline in private investment related to the problems the financial sector has been going through. Indian banks are now trying to turn around failed businesses by roping in new investors under the supervision of bankruptcy courts, while non-bank lenders have been grappling with a liquidity crunch.
The government has in recent months taken steps to improve liquidity in the market and to recapitalise state-run banks. The Reserve Bank of India has been lowering the policy rate to lower the cost of capital for businesses. India’s economic growth slowed down to 4.5% in the September quarter, its slowest pace in 25 quarters, because of a contraction in manufacturing activities.
The growth slowdown driven by a slump in consumption, has raised questions about the government’s management of the economy, inviting criticism from the opposition Congress. Experts expect the measures announced, including the corporate tax cut and those meant to improve liquidity, to take time to yield results.
“One clear policy option to hasten the recovery process could be a direct and strong demand-push injected into the economy through the augmentation of government’s expenditure,” said D.K. Srivastava, chief policy advisor to EY India, in an analysis of the economy.
Subramanian’s Economic Survey for 2019-20, which will be presented in Parliament a day before the Union budget next year, is likely to be a critique of the economy. The CEA gives an independent analysis of the economy, telling the government what needs to be done, though Union budgets often reflect political considerations in policy making.
Subramanian cited China’s experience to show how a high investment rate can lead to a virtuous cycle of higher economic growth, which attracts greater investments. Gross fixed capital formation remained at more than 40% of China’s gross domestic product for almost 25 years, he said.
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First Published:10 Dec 2019, 11:00 PM IST
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