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BOOSTER DOSE

BOOSTER DOSE
01 Oct 2019

Tax incentives announced by the Modi government will help the economy but may not sustain growth

Amid news of a slowing economy and an impending global oil crisis, Finance Minister Nirmala Sitharaman recently announced a slew of measures to boost the industry and kickstart growth, a move that was hailed by India Inc but came under some criticism from economists.

Since the announcement, India Inc has had only good things to say about the government's Rs 1,45,000 crore stimulus, which includes slashing corporate tax to 22 per cent for domestic companies, lower tax of 15 per cent for new manufacturing firms and measures to boost the capital market.

While Sitharaman has announcement multiple measures to boost the economy, this is the biggest booster dose of the Modi 2.0 government in its push to the sagging economy which clocked a 6-year low growth of 5 per cent in the April-June quarter of FY20.

Sitharaman’s measures are also aimed at lifting market sentiment which has seen foreign portfolio investors (FPIs) pulling out their money from the capital market since the Union budget announcement of raising surcharge on them.

The move to lower corporate tax, withdrawal of surcharge and other concessions seem to have hit the right chord with investors as it sent stocks at both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) soaring.

The lower corporate tax effected for 2019-20 through an ordinance is set to induce private investment and boost consumption, the two key growth engines.

Business and industry see the fresh measures helping them in beating the economic slowdown which has gripped the entire country and the global economy for quite some time.

With global headwinds continuing and the world economy slowing, Sitharaman’s stimulus package could not have come at a better time.

Now that the corporate tax rate has been brought at par with many emerging economies and countries in South East Asia, industry watchers hope it will make the Indian economy globally competitive. India earlier had one of the highest corporate tax rates in the world.

For companies going for fresh investments, there is a big incentive now as they will have to pay a lower tax of 15 per cent.

While corporates were hailing the government move some economists and experts highlighted the fiscal risks involved with it.

“The tax reliefs announced are likely to put upward pressure on the fiscal deficit needing a revision in the government's borrowing target for the year. This would likely lead to upward pressure on bond yields but this could get mitigated if RBI chips in with an aggressive policy rate reduction," said Dheeraj Singh, Head of Investments & Fund Manager, Fixed Income, Taurus Asset Management Co. Ltd.

As the new measures will cost the government a whopping Rs 1.45 lakh crore in revenue, many economists believe this will have an impact on government spending.

While the government is hopeful that lower rates will increase compliance, offsetting some of the revenue loss, experts say the fiscal deficit target will be a tall order for the government.

While the government’s measures are most likely to help boost economic growth in the short term, it will need to come up with more to sustain growth in the long term and achieve its growth targets while remaining fiscally prudent.

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