Deepak Parekh on India’s growth story: Macros favouring India, firms should pass on tax cuts to consumers

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September 26, 2019 5:16 PM

The RBI has reduced its benchmark rate by 110 basis points in the past four consecutive policies and the next review is due next week, with some experts anticipating a further cut of about 25 basis points.

Deepak Parekh, India economy, economy news, India’s growth story, Macro, India, firm, tax cut, consumers, corporate tax rate, corporate tax cut, HDFCDeepak Parekh, chairman of financial sector conglomerate HDFC Ltd

Confident about the Indian growth story getting a big boost from the recent corporate tax rate cuts, eminent banker Deepak Parekh has said profit-making companies should pass on a part of the benefits to consumers by lowering their product prices as that would also help increase their sales. He also dismissed concerns about any major impact on fiscal deficit side due to the government foregoing a big chunk of their estimated tax revenues and said a strong disinvestment pipeline, starting with Air India, should help fill the gap.

“Our tax rates have become very competitive now and the government’s move to lower corporate tax rates should help the country attract manufacturing units which we were losing to countries like Vietnam, Cambodia, Thailand, Indonesia and the Philippines,” Parekh told PTI in an interview. “We were losing manufacturing units in sectors like textiles to these countries and fresh investments can now come to India with lower tax rates,” he said.

Parekh, chairman of financial sector conglomerate HDFC Ltd, said the government move has been taken well by foreign investors as well. “The sentiments and confidence level have got a big boost. Profitable companies can pass on part of benefits to consumers by reducing product prices. The companies can reduce their margins a little bit, so that their sales pick up.

“If a company wants to be competitive in the market and if it wants to sell its product more, it should share the tax cut benefits by lowering the product prices,” he said. He said the reduction of GST rates on hotels and catering etc would also give these sectors a boost.

Last Friday, the government slashed corporate tax by almost 10 percentage points as part of efforts to pull the economy out of a six-year low growth rate with a Rs 1.45-lakh crore tax break. Base corporate tax for existing companies has been reduced to 22 per cent from the current 30 per cent; and for new manufacturing firms, incorporated after October 1, 2019 and starting operations before March 31, 2023, to 15 per cent from the current 25 per cent.

Several experts have, however, warned that India’s fiscal deficit will widen as a result of the corporate tax reduction by the government. According to Moody’s Investors Service, the tax rate cut is credit positive for companies, but it is credit negative for the sovereign, as it aggravates mounting risks for the government in meeting its fiscal deficit target.

Asked about the possible widening of fiscal deficit, Parekh said the government has clearly said there are 7-8 central public sector enterprises where they have already got Cabinet approval for divestment. Expecting Air India to go first off the block, Parekh said a part of the national carrier’s debt has already been transferred to another company to make its sale viable.

“Air India may be the first company to be sold to private sector. Similarly, there would be other PSUs,” he said, while sounding confident that the airline would definitely get sold despite failure in the previous attempts. “Disinvestment should take care of the concerns on fiscal deficit side. All of these may not happen in this fiscal, but six months is a long time and 3-4 companies can get sold and generate necessary funds for the government,” he said.

Asked whether the steps were needed to give a push on the demand side too by lowering individual tax rates, Parekh said, “I think it would be difficult to bring down the rates for individuals as the tax for higher earning people has been just increased.” “What the government has done is a much neater way of doing it,” he said.

Economic growth hit over six-year low of 5 per cent for the first quarter ended June 2019 and many economists have attributed it to a demand slowdown. Parekh expressed confidence that the demand would pick up too as macro fundamentals are strong for India and at least half a dozen factors are going well.

“Inflation is at all-time low, interest rates are all-time low and dropping, dollar and rupee are stable and forex reserves are all-time high at over USD 430 billion, which covers around 11 months of imports,” he said. He said India never had this type of cushion in terms of forex reserves and it is a huge achievement as there was a time when the country had just 15 days of cushion.

“Oil price, barring a few days when it went up by around 15 per cent due to attack in Saudi Arabia, has settled down back at 60-65 (US) dollars and it is not near 100 dollars as feared. “What we have heard from Prime Minister Narendra Modi from his US visit, the US has become the largest supplier of oil and commitment has been made by American energy companies that they will do more.

“This means we have a well covered insurance plan for our massive oil imports. Some experts have even said the oil prices could come down to 20 dollars. While all of that is speculation, oil prices going up is less possibility, unless there is a war or something in the Middle East,” he said.

Asked whether the interest rates can go down further, Parekh said, “They can, but they are already low.” “Besides, chances of rates going up are not there for sure. A marginal drop may be there next time,” he said.

The RBI has reduced its benchmark rate by 110 basis points in the past four consecutive policies and the next review is due next week, with some experts anticipating a further cut of about 25 basis points.

Parekh said that even a little larger fiscal deficit should not be a concern if GDP growth was good. He said the fiscal deficit target of 3.3 per cent was a self-imposed one and it was our own commitment. “It is an internally decided number and marginally going up to 3.4 or 3.5 per cent should not be a problem. I am not talking about going up by say 1 per cent, which would mean over Rs 2 lakh crore,” he said.

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