As we all know, the Indian economy is going through one of the worst economic recessions it has ever witnessed in modern history. Starting from auto and realty sector, manufacturing, FMCG (Fast Moving Consumer Goods), agriculture and even underwear industry are facing big sale drops and inventory pile ups. All these symptoms are of a typical business cycle. I do not want to discuss the causes of this business cycle here in detail as I have already done that elsewhere. In short, the Indian central bank RBI and its master government are solely responsible for the recession.
Industry leaders were panicking and demanding that the government announce some kind of a relief and rescue package. The finance minister Nirmala Sitharaman so far was in denial about this recession as she was not ready to accept publicly that there is any recession in the Indian economy, but major policy decisions declared last week show that she can no longer ignore this mammoth problem. Last Friday Sitharaman cut effective corporate tax rate from 30% to 25% for eligible domestic industries, which prime minister Modi, as usual, termed as historic (sic). With that she also tweaked GST rates for many items except the Auto sector which is feeling maximum heat of the recession. Hearing this news the Bombay stock market index BSE Sensex jumped by some 2000 points. Most industry leaders welcomed this step and they are of a belief that this corporate tax cut will end the recession and that the recovery is just around the corner. Many experts are calling this move India’s New Deal! The media is terming this move as Modi’s surgical strike on the bear market! Hailing this move as historic, Modi tweeted,
The step to cut corporate tax is historic. It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win-win for 1.3 billion Indians.
Keeping aside the usual drama and euphoria with everything that Modi does, the real question is, is this high corporate tax rate was the only thing that was holding Indian industries and economy back that a little bit of tinkering with it will end the recession and bring prosperity to India? Is this really a win-win for Indians? We need to see this tax tinkering in a larger context.
To begin with, immediately after this announcement the Indian government bond yields jumped to its three months high expecting a fiscal slippage by the mammoth Modi government. We must not forget how this stimulus package to corporate world is being funded by Modi government. This package is going to cost the government roughly 1.50 lakh crore rupees. This is the same amount that Modi government has recently received from its central bank RBI. This means, as ZeroHedge explained, this is Modi government printing money to cover its extravagant expenditures and fund such stimulus packages. This is not at all good for the economy. Government has already used 77% of its total budget for this fiscal year. Estimates now show that government will very likely breach the budget deficit target of 3.3%. Still there are 8 more months to go in this fiscal year, and Modi government’s massive fiscal programs need massive funding. Modi government is not going to reduce its size, which is the major problem, voluntarily. It will never reduce its expenditure drastically to balance its budget. This package has created a hole of 1.50 lakh crore in government’s pocket, and it will definitely fill this hole either by fresh money printing sprees from the RBI or raiding RBI for its remaining surplus funds or LIC or Pension funds. In both cases the government is taking India closer to insolvency and final bankruptcy.
Secondly, the corporate tax alone can’t revive the economy if other changes like freeing up the economy of all other government regulations and controls are not going to accompany it. RBI itself is the 800 pound Gorilla sitting in the room that everyone is ignoring. RBI is the root cause of business cycles. As long as it is in existence, economy can never become normal. Government’s manipulation of various market prices means the capital and production structure of the economy will remain disturbed. Even after getting a cut in their taxes, corporations will very likely reinvest their funds in production of those goods that people do not want e.g., cars. A manipulated price and profit & loss system means businesses do not know what people are really demanding and so they will continue to produce wrong goods. RBI’s manipulation of market rate of interest means the coordination of production between present and future goods will remain faulty. In such an interventionist, centrally planned and controlled economy and society, there can never be any lasting prosperity for all Indians; there is no win-win for 1.3 billion Indians. We will continue to see one bubble activity after another. Cities will continue to clog while rural areas see no growth and development. Environmental damage due to pollution will continue when at the same time government asks and helps people to buy more cars! This is not development. This is not growth. This is destruction.
Also, calling India’s corporate tax cut on par with other East Asian countries like Hong Kong, Singapore, Taiwan, China, Japan, Malaysia etc., is stretching the comparison too far. This is like comparing an apple with orange. Those other East Asian countries, with a lower corporate tax rate, also have basically Capitalist economies, strong internal economic, political, social, cultural and legal institutions, a population with a very high average IQ, world class universities and research institutions, a robust labor force with high level of human capital and productivity, and an overall culture that encourages entrepreneurs. India has none of these conducive factors needed for high growth and overall prosperity. Just this tax cut doesn’t mean India automatically becomes a hub for foreign businesses. As Chetan Bhagat recently said, India is not only a very high tax country but the tax and other government policies change abruptly at the whims of politicians and bureaucrats who are using those policies to win elections and reelections. The overall regime uncertainty in India is extremely high. The Indian labor force is unskilled and not trainable. It is a liability and not an asset. Under such kind of business environment only those who want to lose money will invest in India.
Tinkering with this or that tax rate for short term political gains is not going to fix India’s problems. As long as the overall culture and underlying characteristics of the populace is not changing, India is not going to change for any good. The mammoth state, which interferes everywhere, must first go. As long as that state exists, things will not improve permanently. We will continue to see such periodic chaos and then final end one day.