Evidently, India’s finance minister does not read The Indian Express. Else, she might have heeded the well-argued plea of a cautious former central banker not to engage in fiscal stimulus. Within days of that plea appearing in print, she had unveiled a radical corporate income tax cut and stunned the nation with the boldness of the measure and the vision behind it.

The corporate tax cut cannot yet be called an economic stimulus measure because its effect will be felt only if the corporate sector responds by raising its investment spending. Its significance lies elsewhere. It signals the Prime Minister’s slaying of the ghost of the “Suit-boot Ki Sarkar" jibe that had influenced his government’s attitude to the commercial sector over the last four years and more. The tax rate cut, and more importantly its simplicity, suggest that the government is prepared to shed the instinctive (and not well thought-through) anti-business mindset that has characterized its policies. That is the most encouraging message of the tax rate cut. The announcement is surely a sentiment-changer and it shifts the narrative decisively from one of “doom and gloom".

Financial markets cheered the announcement very loudly. One should not be surprised. Corporate tax cuts are the opium of stock markets. They dull critical thinking. Of course, critical thinking does not mean pointing out the potential rise in the combined fiscal deficit of the Union and state governments due to the tax cut. That ignores the possibility that animal spirits are revived, and economic activity picks up sufficiently enough to offset some of the estimated revenue loss.

The tax cut announcement has stifled scrutiny of the announcement of a loan mela that was made the previous evening. That was a throwback to the 1980s, when Rajiv Gandhi’s government gave the country loan melas and sacrificed medium-term sustainability for a short-term economic boost. It also opened up external commercial borrowing for sectors that did not earn foreign exchange (think affordable housing schemes accessing foreign currency borrowing). This government should not forget that the medium term might arrive before its term ends in 2024.

The Reserve Bank of India has delivered on interest rate reductions. It has conducted unprecedented open market operations. The government has recapitalized banks, and has merged a few such that the combined entities have a better risk profile than before. If lending has still not picked up, it behooves the government to figure out the root cause of it and not shove a loan mela down the throats of reluctant bankers.

First, a lack of credit offtake is as much an issue of demand as it is one of supply. Perhaps, the tax cut will lead to some pickup in demand for credit from the non-financial sector. If surveys had indicated that businesses were finding it difficult to obtain bank loans, then there would be some justification for the government to contemplate coercive measures. In these pages in the last two months, yours truly has suggested some deep-seated reforms of the governance and regulation of the banking sector to get bank credit flowing again.

Banks’ lending rates are now linked to external benchmarks. As a former central bank official pointed out recently at a conference, banks’ deposit rates are not externally benchmarked. This has the potential to erode the net interest margin of banks considerably. He suggested that retail deposits above a certain threshold—say, 50 lakh—and all corporate deposits should be linked to floating rates. That has not been done yet.

Second, it makes no sense to lean on bankers to lend indiscriminately and then investigate them for fraud once non-performing assets begin to pile up. Public sector banks have to be taken out of the purview of the Bank Nationalisation Acts and placed under the Companies Act. That would be a fitting way to undo some of the damage done by misguided policies of the Congress party.

Reforms have to be packaged and delivered holistically. Else, there is much scope for the law of unintended (and usually undesirable) consequences to prevail. The counterpoint to the loan mela announcement is not a corporate tax cut, but reforms of banking governance and regulation. Similarly, corporate tax cuts must go hand in hand with privatization in a manner that revenue implications of the cuts are taken care of. Agricultural income tax—above a threshold income of, say, 50 lakh— should be accompanied by the empowerment of farmers to sell their output without any restrictions on price, place and quantity. Forbearance on loans to small and medium enterprises should be packaged with borrowers being held accountable for achieving business growth and scale efficiencies.

It may be our prerogative to conclude that the government will not undertake these reforms. But that would also be presumptuous and premature. On balance, it has begun well in this second term, and it has demonstrated that it is willing to tread into uncharted territory. One hopes that its journey continues along the paths suggested above, and the destination of a $5 trillion economy is not only reached ahead of time, but high growth is sustained.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business, Krea University. These are his personal views.

These are the author’s personal views