Home Opinions Lower corporate tax and cost of capital to river interlinking: My wishlist for Budget 2019

Lower corporate tax and cost of capital to river interlinking: My wishlist for Budget 2019

The government should consider India’s trade policy and express a desire to enter into Free Trade Agreements with major developed economies within the next couple of years

The previous article outlined some of the key challenges in front of the Indian economy on both the domestic and the external front. This article is geared towards my wish list from the Union Budget. To cut the long story short, a budget geared towards promoting growth combined with an indication of continuity of reforms is likely what most of us want.

There are several policy tools that the government has to kickstart growth, and not all of them can be accommodated in the budget. For instance, labour reforms or land reforms are outside the scope of a finance bill, yet they’re likely to have a significant impact on India’s growth as they’d resolve systematic bottlenecks that have clogged India’s manufacturing sector. Similarly, real interest rates should come down, and over there the RBI has to play a more proactive role than the government. But here’s where it gets interesting, the government does control the small savings deposits rates and it can lower some of these deposit rates to bring down the cost of capital.

It is about time that the government realizes that inflation has remained way too low over the last couple of years and therefore, in a low inflation regime we’ve adequate space to move towards low rate of interests. Low cost of capital is critical to help bring in requisite investments and give a major boost to our growth.

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Another area where the government could intervene is the corporate tax rates; the High-Level Advisory Group (HLAG) mentions how India has the highest corporate tax rates in the world. While we’re in the middle of a trade war that’s disrupting the global value chain, such high corporate taxes only disincentivise foreign manufacturers to view India as their preferred investment destination. Both, low rates of corporate taxes and low cost of capital would go a long way in stimulating the economy through increase in private investments.

On the macroeconomic front, the government should consider India’s trade policy and express a desire to enter into Free Trade Agreements with major developed economies within the next couple of years. From what we can infer based on the last one month and a half, the Ministry of Commerce and Industry is likely to play a proactive role in achieving this. FTAs will further signal to firms that India is open to business and combined with rational import tariffs we can witness greater integration of India in the global value chain.

Apart from them, perhaps the government can modify the personal income tax exemption till Rs 5 Lakh and convert it into a tax slab so that the benefit of the same is extended to all taxpayers. However, if there has to be a choice between giving a benefit to personal income taxpayers and corporate income taxpayers in this budget then I believe the government should prioritize with corporate tax rates as it will have a big multiplier effect on the economy.

On fiscal deficits, I’ve mentioned before, and I will reiterate that we need to understand the causality between deficits and growths. It is highly likely that growth or economic slowdown has an impact on what happens to deficit, rather than the other way around. This means that deficits may not be capable of creating growth or slowdowns. Similarly, whatever evidence we have on deficits and inflation for India is very weak and this suggests the need to reevaluate our knowledge on deficits. In my view, through some limited empirical testing backed with the recent empirical literature on the subject, deficits themselves don’t matter so long as the deficits are used for productive purposes.

Therefore, the government should not shy away from investments in this budget for the fear of being unable to reduce the deficit as per its original target. The only consideration on deficits should be on the impact it would have on the yield of government securities given that we want the cost of capital to reduce. So long as the government can ensure both, it should invest in developing infrastructure be it roads, railways or even, or rather most importantly, waterways.

We’ve procrastinated a lot on the project to interlink our rivers given that we’ve been discussing it since 1980s. If there’s a government that has the political capital to bring together multiple stakeholders and make this project a reality, then it is this government. India’s current water crisis needs some serious policy interventions and the government has already committed towards interlinking rivers. Therefore, the government should ensure that it invests extensively in this area over the next decade and this budget would be an excellent opportunity to begin with such an allocation.

The wish list of reforms is perhaps longer than the one from this budget, but we’ve a dynamic and talented finance minister who brings with her a lot of experience to deliver a 5 trillion-dollar economy over the next 5 (or 6 years). The goal is achievable through concentrated policy action so here’s wishing for a budget that begins with its process.

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