BackOpinion | Bravo for the big fiscal shot!
Finance minister Nirmala Sitharaman has cut the rate of corporate tax for firms that do not avail of tax incentives to 22%
PremiumA fiscal stimulus loaded with ₹1.45 trillion of firepower has finally been declared by the government, and Indian stock markets have good reason to rejoice. The tax cuts for corporate India are dramatic indeed. Finance minister Nirmala Sitharaman has cut the rate of corporate tax for firms that do not avail of tax incentives to 22%. With a surcharge added on, the effective rate is estimated at about 25.2%, a tad above the figure that India Inc. has long demanded in its quest to turn globally competitive on returns to investors. The Union budget had granted a 25% basic rate only to companies with turnovers of up to ₹400 crore, leaving larger firms gloomy at 30% and creating an arbitrary and misguided cut-off. The corrective alone would have been reason to cheer. The rate slash is a huge bonus.
The good news doesn’t end there. In an effort to attract fresh investment, the rate for new manufacturers shall be lower still, at 15%. Minimum alternate tax has also been reduced, and, to the relief of stock investors, the Budget’s enhanced surcharge on capital gains made on equity sales has been withdrawn. All in all, these are bold moves aimed at a broad corporate revival, which would, in turn, aid the economy in the near term.
The ₹1.45 trillion of tax revenue forgone, though, has resulted in a spike in domestic bond yields, a sign of a looming fiscal deficit problem. It is now almost certain that the budgetary target of 3.3% of gross domestic product (GDP) will not be met. Tax collections so far this year have fallen woefully short of the Centre’s projections, the result of a wide economic grind down. The gap could possibly be plugged with a vast disinvestment programme, aimed at raising far more than the year’s target of ₹1.05 trillion. But the government, it seems, is now ready to abandon its fiscal glide path towards a fisc of 3% of GDP. Has it decided to reflate the economy? That’s what it looks like. This steroid shot would prove well worth the deficit enlargement if it reverses the current downtrend. As reflationary effects take hold about a year or so ahead, however, the central bank will have to keep guard. It must not abandon its retail inflation cap of 6%.
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