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View: Lower tax will boost sentiment, liquidity and investments

While India will and is trying its best to make use of adverse global trends, its worry largely has been domestic upheavals.

ET CONTRIBUTORS|
Sep 21, 2019, 08.15 AM IST
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The next round of reforms will have to be structural.. agri, mining, textiles & labour reforms can sustain growth story.
By Amitabh Kant

Amid the global turmoil, the world is closely following India’s growth story. It will decide the course of the global economy and also the standard of living of 1.3 billion people. This government is fully cognizant of its responsibility to keep India on track for 8-9% growth rate. It was no coincidence that over the last five years, India has clocked an average of 7.5% growth. As a consequence of which we have been able to pull 271 million people out of poverty. We are also on course to provide housing, electricity, drinking water and clean cooking fuel to all Indians.

However, India has been caught in the eye of a growth conundrum due to global trends and domestic slowdown. While India will and is trying its best to make use of adverse global trends, its worry largely has been domestic upheavals. Last quarter, India recorded a growth rate of 5%. This was largely due to the IL&FS fiasco that had a domino effect on the economy. It adversely impacted the entire credit ecosystem – particularly the banks. This led to constrained lending by the NBFCs, which are much more flexible and adaptable. As a consequence, consumer lending and investor sentiment took a plunge and India’s growth rate took a hit. Nevertheless, Indian institutions have shown remarkable agility in responding.

We must give credit where it is due. The RBI and the government quickly swung into action. Since January of this year, the repo rate was reduced by RBI by 110 bps—from 6.5% to 5.4%. To ensure transmission of lower rates to spur consumer spending, the government also went into a reform blitzkrieg. It announced three reform boosters, undertaking major impending reforms.

The initial injection of ?70,000 crore into the banking system, followed by RS 5 lakh crore liquidity, along with Rs 20,000 crore support to housing finance companies is rejuvenating the economy from the ground up. The government announced the historic merger of 10 public sector banks into four. This will bring in long-term efficiency gains to Indian banks, and increasing access to credit.

These three boosters comprised several other notable measures impacting sectors such as banking and finance, MSMEs, investment, automotive sector, infrastructure sector, financial markets, corporate governance, trade and housing.

Today comes the fourth reform booster—a big, bold and historic announcement. The government will reduce corporate tax rate for domestic companies to 22% from 30%, and for new manufacturing companies it will be reduced from 25% to 15%, with effective tax rates being 25.17% and 17.01%, respectively. Of significance is also the fact that these companies will also not be required to pay the minimum alternate tax (MAT).

This is bound to further unleash the animal spirits of the Indian markets. One of its crucial impacts will be that it will boost private investment and also improve the competitiveness of Indian firms. The manufacturing sector is bound to get a fillip from these measures, giving the ‘Make in India’ programme a major thrust. Liquidity, investments and sentiments will all surge. As the bottom lines swell and we move into the festive season, the corporate earnings gains will have a ripple effect across the economy.

As of now, our corporate tax rate is comparable to our Asian peers, according to KPMG. For example, in Malaysia, the corporate tax rate stands at 24%. In China, Korea and Indonesia, it is 25%.

One must not look at these reform boosters as standalone activities. Instead, they are finely balanced moves to make India a $5 trillion economy which provide a level playing field to all businesses, aim to make India a preferred destination with best business environments and increase the nation’s productivity and competitiveness.

The next round of reforms will have to be structural. Agriculture, coal and mining, textiles and labour reforms alone can sustain India’s growth story with employment over a long period of time.

As we celebrate this major move, I want to close this submission on a humble note. Former finance minister Shri Arun Jaitley promised that the corporate tax rate would come down to 25%. There is no better way to pay homage to a policy maker with a vision than implementing his vision that would go a long way in transforming the Indian economy.

(The author is CEO of Niti Aayog)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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