Last Friday was a big day in India’s economic history. India moved from the league of countries that are inward looking, populist and focused on short-term gratification of masses to a league of countries that aggressively compete for foreign investment and willing to take bold decisive strides for long term structural growth.
No earlier Indian government had bet Rs 1,45,0000 crore at one stroke. Also these steep cut in taxes signifies a big mindset change of policy makers who had viewed profits as a vice and poverty as a virtuous trait. The pragmatic and open minded governments world over, have been discovering that lure of profit alone drives investment and creates employment.
The government has demonstrated flexibility and humility to change its own decisions quickly and prevent damage. The corporate tax increase done in the Budget, has been more than reversed in less than three months.
The piecemeal and incremental measures would not have been sufficient to halt and reverse the economic slowdown which was deepening. One can debate the negative impact in fiscal deficit but the imperatives to rev up the economic growth engine, far outweighs the slippage on fi ..
The effective tax rate of 17 per cent for new manufacturing facility, with no sunset clause, makes it very attractive for foreign companies to set up factories here. The ‘Make In India’ dream can now come true.
For many companies in Europe, earlier there was only labour cost arbitrage but now also there is a tax arbitrage as well. It makes sense for them to have modern manufacturing facilities near the market where not only labour costs are cheaper but also tax rate is lower.
Also many companies looking to move away from China, can evaluate India as a serious alternative. In the next few years we should see a significant momentum in terms of new manufacturing capacity and that will create jobs. Some people are concerned about job potential of new factories with high level of automation. We should not forget the new factories create several jobs around it from raw material/ ancillary suppliers, vendors, service providers, transport operators, distributors and also the higher purchasing power of people employed in such manufacturing facilities. One organised sector job can create more than two jobs in the informal sector. Also construction of manufacturing infrastructure like the constructing factory, installing plants/ machinery etc create jobs and help income growth.
While this is the largest reform in direct taxes, we had seen similar reform in indirect taxes in 1991, in the wake of currency crises. India has never looked back since then and India’s growth rate was reset from 5 per cent level to 7-8 per cent p.a. level. It’s time for India to dream double digit growth in not too distant future.
The domestic companies with greater owners’ surplus left after lesser taxes, will have more equity to invest. We know something similar was done by Donald Trump when he reduced taxes in USA from 35 per cent to 21 per cent. It attracted investment and encouraged companies to repatriate funds back home. In the process, USA has witnessed spurt in private investment and very low unemployment. India has been witnessing an exodus of dollar millionaire, setting up companies in Singapore and elsewhere. These wealthy entrepreneurs have good reasons to stay back and let their capital work for fellow citizens.
It needs no emphasis that the tax reforms have to be followed up and complemented by rationalisation of GST and individual tax rates, but more importantly further simplification of bureaucracy and rules.
What investors need is not ease of doing business alone but also ease of setting up a new business and also closing the same if the need be. These require mega land and labour reforms. One can be very optimistic about these reforms from the present government.
The most important takeaway from the courageous tax reform is that the government is committed to ensure high economic growth and willing to take bold unorthodox steps to be competitive in the global economy and welcome foreign investment. It recognises the fact that capital is most important factor of production which is in scarcity in India whereas other factors of production namely labour and enterprise are in abundance.
While many analysts and observers are excessively obsessed about the short term outcome of the market reaction, the real and lasting upliftment of masses is always by long term structural and bold measures. India has just accelerated its march to be a $5-trillion economy.