Corporate tax cuts to give excellent support to steel industry

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Published: September 24, 2019 1:58:11 AM

To top it all, the GDP in Q1 of Fy20 at 5% confirmed that something drastic must be done to get the economy back to a higher growth trajectory.

Further, the liquidity crisis experienced by non banking financial corporations restricted the credit flow to the MSME sector.Further, the liquidity crisis experienced by non banking financial corporations restricted the credit flow to the MSME sector.

The year 2019 holds out a number of surprises for Indian economy. After the continuation of initial few good months, IIP fell from 8.4% in October 2018 to 4.3% in July 2019, primarily contributed by manufacturing sector declining from 8.2% to 2.5% during the period. The advance estimates of GDP, consumption and investment for FY19 put Q4 GDP growth at 5.8%, the lowest of the previous three quarters and for the full year at 6.8%. To top it all, the GDP in Q1 of Fy20 at 5% confirmed that something drastic must be done to get the economy back to a higher growth trajectory.

Corporate tax rate cut decoded! Why FM Sitharaman’s announcement is a Diwali bonanza for economy

In earlier columns, we have discussed the role and support of the government policies in boosting up the economy. Economic theory suggests that advanced countries need minimum government intervention and its role is predominant only in the early development stage. This premise has already been proved wrong by the intense intervention of the government in shaping the economic policies in countries like the US, Germany, France, the UK and Japan.

From the series of interactive sessions held by our finance minister with different groups of industry, service sector, agriculturists, financial institutions, exporters, it became clear that inadequate availability of fresh investment, much more than what can be sourced from the limited space offered by GST and other direct taxes, is the crux of all the pains and ailments. Private corporate sector was apprehensive of the return of investment being unsure of the market absorption and the declining commodity prices aggravated the turnover. The falling investment by the private corporate sector was evidenced by its share in total investment stagnant at 12-13% of GDP.

During these years, the steadfast concern of RBI only to manage inflation did make the cost of credit high. But when RBI decided to reduce the repo rate from 6.25% in Fy19 to 5.4% currently, the immediate impact on investment was staggered as capacity creation was not favoured due to faltering demand. Further, the liquidity crisis experienced by non banking financial corporations restricted the credit flow to the MSME sector.

A bogey of policy measures recently announced by FM must be seen against the above background. The reduction of Corporate Tax on domestic companies from 30% and 34.94% (including surcharges) to 22% and 25.17% (including surcharges) would release around `1.45 lakh crore for investment and consumption by the corporate sector. The new firm formed on or after October 1, 2019 would face a tax at 15% (against current basic rate of 25%) if output commences by March 31, 2023. For them, the effective tax rate comes to 17% (previously 29.12%, without exemptions). The scheduled banks have been advised not to declare loans taken by NBFCs as NPAs. They would also be holding 200 interactive meetings in different districts with MSME sector immediately and another 200 meetings in mid October 2019 to dispel doubts and uncertainty of fund availability for working capital and capacity creation purposes. Thus, the policies would be widely communicated to the beneficiaries to receive immediate support. A rough estimate has shown that around Rs 44,000 crore would be the kitty of tax saved (rise in PBT) by around 3,446 listed firms. The announcement of Rs 20,000 crore as Real Estate stressed asset fund would also help selling of unsold dwelling units.

Analysis shows that FMCG sector would witness a 5-12% rise in earnings. The NBFC sector is likely to save around Rs 300 crore to redeploy as loans. The government had earlier received Rs 58,000 crore surplus from RBI (in addition to Budget), but lower tax receipts and higher spending may lead to fiscal deficit to reach 3.7% of GDP which is manageable.

The above measures provide excellent and timely support for all industrial sectors specifically manufacturing. The Make in India programme would receive a big boost with SME sector commencing the output backed up by financial support to lead to higher capacity utilisation, income and job creation.

This bonanza is no less than a blessing for the steel industry at the current stage. The rejuvenated market would boost up steel consumption which has come down to 6.1% growth in the first 5 months of the current fiscal with crude steel production rising at 2.4% only. The real estate sector, infrastructure (roadways, railways, civil aviation, ports and irrigation), capital goods and consumer durable sectors would require more steel. The lowering of corporate tax has made Indian tax structure comparable with Asean countries (China:25, Indonesia: 25, Bangladesh:25, Malaysia: 24, Japan: 23.2, Thailand:20, Vietnam:20, India:22) and therefore, more FDI is expected in steel (POSCO, Arcelor Mittal) and other sectors opened up (retail, real estate, roadways, defence equipment) and all these are steel intensive sectors. The availability of surplus resources would enable the steel companies to create subsidiaries to avail lower tax incidence. They would also be prompted to restructure the market debts and improve their asset quality. The brown field expansions (JSW, TSL, SAIL, JSPL) are to continue unabated along with new product development to substitute imports (CRGO, Auto body sheets, API> 65). Rural steel demand must now be captured to the maximum by organising more interactive sessions with masons and small contractors to familiarise them with quality steel application in houses and other rural structures. Skilling activities in steel plants would also get a much needed boost.

The author is DG, Institute for Steel Development & Growth (Views expressed are personal)

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