NEW DELHI/HYDERABAD: While the big-bang corporate tax reforms cheered India Inc and markets, many top economists wondered whether these would reverse the slowdown in the economy, while other analysts warned of the fiscal deficit ballooning.
Most economists felt that while the move would give a supply-side boost to investment, it would not address the real concern of slow demand afflicting the economy.
“I won’t say it is too late, but perhaps too little … It is a welcome supply-side measure, it is a good reform, but to expect it to work miracles is perhaps too much as the problem we are facing is demand side,” said Prof Govinda M Rao, former Member of the Prime Minister’s Economic Advisory Council.
India’s GDP grew by just 5% in the April-June 2019, its slowest quarterly expansion in seven years. The country’s passenger vehicle sales had contracted 32% in August.
Consumer goods companies also reported worsening sales on weak consumer demand.
“Had the huge sum being foregone in taxes been used to increase the income of the lower-income group, the money multiplier effects would have worked and demand would have been boosted considerably. Raising corporate incomes may result in savings, but may not result in any immediate investment upside,” said Pronab Sen, former chairman, National Statistical Commission.
Traditionally, demand-side weaknesses are addressed by either an expenditure push by the government, which creates new jobs and thus new demand or by cutting personal income taxes to put more money into the pockets of spenders.
“Today’s announcement has to be backed up by front-loading spending on infrastructure and perhaps a more direct stimuli to demand,” said N R Bhanumurthy of the National Institute of Public Policy and Finance.
The country’s fiscal deficit is also expected to surge 70 basis points to 4% of the GDP. In the absence of expenditure cuts, deficit could even spike to 4.1% of GDP.