Nirmala Sitharaman’s corporate tax cut to boost $5 trillion economy dream

Published: October 4, 2019 9:30:24 AM

The first positive development is that the country has now become much more competitive in terms of ease of doing business as the tax on companies is now on a par with other global economies. 

FM Nirmala Sitharaman
  • By- Deepal Shah

Billed as the third significant reform after the roll out of the goods and services tax (GST) and the insolvency and bankruptcy code (IBC), the government’s decision to slash the effective corporate tax rate will go a long way in
achieving the Prime Minister Narendra Modi’s cherished dream of becoming a $5 trillion economy. There are three elements that may work in favour of the government to achieve the target of doubling the size of the economy in the
next five years.

The first positive development is that the country has now become much more competitive in terms of ease of doing business as the tax on companies is now on a par with other global economies.  This will indeed be mirrored in
enhanced foreign savings coming to the country through the foreign direct investment (FDI) route, going forward. The timing of the move is uncanny as the trade tensions between the US and China is unlikely to die down any time
sooner.

The enhanced capital flow from abroad may renew the launch of new projects announced which will have a cascading effect on the country’s effective demand. The major beneficiaries of the revival of such projects will be the
capital goods sectors such as steel and cement along with the ancillary industries which mainly fall in the small and medium enterprises. These sectors also have the highest forward and backward linkages in the economy. This is expected to have a major impact on job creation since SMEs are the key drivers of job growth.

This should be seen in tandem with the government’s Make in India push, the centerpiece of industrial policy. The traction in this space will lead to accelerated growth in manufacturing since global companies lured by lower taxes, easy credit and an opportunity to access large market will eye India as their next growth trajectory. In addition, the global companies looking for an alternative destination to China may also shift their production base to India to
source products for the international markets. In short, India will become an integral part of the global value chain of global corporations.

The second important factor that will play out in favour of the business is the increased profitability reflecting in higher corporate earnings.  This is going to be a major positive for not only the stock market but also for the economy as a whole. As the finance minister has rightly said the animal spirits in the economy will be unleashed with the private sector expected to take the lead in turning the capital expenditure (investment) cycle up.  This will also lead to higher employment generation and income for the common masses reviving the core theme of consumption which is the fulcrum of the India Growth story.

The third factor that may play out as a positive for investors is the revival in corporate earnings upgrade. Leading brokerages have already upgraded the earnings outlook for the corporate world stemming from the rationalization of the corporate tax structure. It is expected that the earnings of average firms will go up by approximately 7% to 10%.

It is true that the reduction in corporate tax collection may affect the government’s revenue projections in the short run.  However, any slippage in the fiscal glide path is likely to be temporary since enhanced investments will lead to the elevated activity level in the economy leading to higher spending and hence higher tax collection.

It is also heartening to see that the monitory and fiscal arms the Government are on the same page in ensuring that India remains as one of the fastest going large economies in the world. The Reserve Bank of India has made it
amply clear that its rate-setting committee would be looking to cut the key policy rates in its next meeting, making liquidity amply available for business houses with a good credit rating.  The finance minister has also hinted that the government is open to revisit the payroll tax structure very soon that will further enhance the disposable income of the people.

The sentiments have certainly improved with several sectors reacting differently. Logistics is considered the backbone of the economy, supporting the consumers on the sidelines. This sector will certainly witness jump. These positive developments will lead to a spate of capacity expansions and increased manufacturing and industrial activities across industries and also drive the growth in the logistics and warehousing sector. The private investment cycle will begin and India will emerge as an attractive investment destination because of the corporate tax cut. A key catalyst to the wave of development is logistics and warehousing sector. With new-age technology, progressive logistics players will play a pivotal role in catering the growing logistics and warehousing needs. Logistics companies will also be able to offer competitive tariff to its clients banking on the corporate tax cut.

  • Deepal Shah is CFO, Allcargo Logistics Ltd.

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