FM gifts corporates with ₹1.45 L cr tax cuts leaving consumers in a lurch

rupee, corporate tax, economic slowdown, dollar
There is a nice name for a decision based on faith and laws of uncertainty — gamble (representative image: iStock)

Finance minister Nirmala Sitharaman is the butt of plenty of jokes these days. One of them envisions her at a bank without an ID. Asked to prove her credentials the FM pleads her mind is completely blank and she has absolutely no clue what to do. The cashier immediately identifies her as the finance minister blessed with the ability to do nothing, understand nothing.

In the world of WhatsApp forwards and tweets, jokes travel at the speed of lightning. It is quite likely that the FM has heard some of them and has set about on the mission of burnishing her image. From a minister who does nothing, she wants to be seen as someone who does something, actually, anything.

So, as part of her Friday releases, the FM has unveiled tax cuts and a few more sops for corporates. The headline of her post-budget tax proposals is that Indian corporates would now pay 25.2% tax instead of 35% — this too with retrospective effect, starting April 2019. The 10% cut would leave ₹1.45 lakh crore extra in the pockets of Indian corporates, making their bottom lines healthier.

Also read | Centre announces ₹1.4 trillion pre-Diwali fiscal bonanza

The stock markets have reacted with characteristic glee to this Black Swan event — unexpected, unparalleled and rare — and have zoomed towards circuit breakers. That’s expected — if the companies are going to have 10% more, they have automatically to be valued more.

But, how exactly does this help the Indian economy?

The Indian economy has been contracting over the past few quarters at an alarming rate, in the previous fiscal it had touched 4.9%, the slowest in seven quarters. Experts and analysts believe the slowdown is because of the fall in demand of products and services. And the absence in demand is a direct result of falling incomes, lack of jobs and diminishing savings.

How exactly does the FM plan to revive growth by giving more money to corporates but not to consumers? For instance, consider the case of Maruti, whose sales were down 32.7% in August. Even if Maruti has to pay less tax this year, how will it clear the unsold inventory, snare clients and restart units that have either been shut down?

The answer, as the joke goes, we don’t know.

Also read | FM’s ₹1.45 lakh crore corporate tax gamble good optics, poor economics

The hope within the optimistic is that corporates would pass on some of this benefit to investors ad dividends, perhaps cut down costs of products marginally and invest the savings into capacity expansion, which will generate jobs. But, seriously, does anyone really see Maruti handing out more dividends and scaling up production in a scenario of low-demand and an uncertain future?

There is a nice name for a decision based on faith and laws of uncertainty — gamble. The FM, lest the corporates prove everyone wrong by becoming socialist and sharing the Black Swan gift, has just wagered ₹1.45 lakh crore — after making the RBI part with a near-equivalent amount — with the hope that it will revive the economy, lead to investment in infrastructure and generate jobs. But wishful thinking is not economics, it is robbing-Das-to-pay-Patel politics.

The more rational way of creating demand would, of course, have been to start right at the bottom by putting more money in the hands of buyers. India is in the middle of a festive season and people are generally in the mood to spend the most during this period. If the FM had announced huge cuts in income tax rates, it would have put surplus money in the hands of consumers, who may have been tempted to spend some of it in the market. But, so far nothing has been done to address the consumer-end of the problem.

Also read | Investor wealth spikes ₹2.11L cr after Centre slashes corporate tax rate

Something must be really wrong in a country where corporates pay 10% less tax than individuals. But the poor politics is compounded further by bad economics. Imagine the euphoria generated by a 10% cut in tax slabs and simultaneous easing of GST rates and borrowing rates. India’s middle class would have gone singing and dancing to the malls, showrooms to celebrate Diwali, putting huge amounts of money in circulation — the perfect cure for a slowdown. Remember, growth stops when people stop buying.

It is quite likely that the government is planning to extend its generosity to the consumers as well. It is possible that the FM’s next Friday release is less tax income tax or some Diwali bonanza. But till that happens, the crux of the joke on the FM is unlikely to change.

At the moment, the FM is following the Newtonian formula of F=ma (public pressure makes the minister takes action). Her real test would be Newton’s other law—action should lead to expected and equal reaction.

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