After two days of a buying frenzy on the stock exchange, bulls rested a bit on Tuesday. On Tuesday, Sensex and Nifty were nearly unchanged at the end of the third day trading following the extraordinary cuts in corporate taxes and other incentives lifted the spirits of the markets. Both on Friday and Monday markets registered four-digit gains in Sensex and Nifty. Both Nifty and Sensex were almost in free-fall before the government stepped in to stem the decline. And, how spectacularly it did it. Never-heard of cuts in corporate taxes established a near parity with the East Asian Tiger economies. Indian corporates could have no reason to complain on that score now. The euphoria from the singular cuts fuelled the sentiment on the markets. Even though the markets remained more or less unchanged on Tuesday, the mood was distinctly bullish.
Markets had now pinned their hopes on the RBI’s monetary policy next week. Should there be a small cut in the repo rate, there could be a renewed buying spree on the bourses. Overnight the pendulum seems to have swung from despondency and dejection to high exhilaration and euphoria. But the question that must be asked is whether it is real? Have the corporate tax cuts and a few other incentives for fresh investment by domestic and foreign entrepreneurs in manufacturing changed the basic Indian reality? Has the stifling bureaucratic sloth and red-tape vanished to facilitate foreign and domestic hassle-free investment? Have petty corruptions disappeared at one go with Finance Minister Nirmala Seetharaman’s last-ditch effort to rescue the economy from slipping into the slowdown it was widely feared to be headed for before Friday, September 20? The land acquisition for industry continues to be as arduous as before. Antiquated labour laws despite a welcome but weak effort to reform them remain an obstacle.
Infrastructure woes continue as before. Transport, communications, port constraints faced by the industry remain unaddressed. Besides, domestic demand continues to be lackluster while the global slowdown translates into a dampening of export growth. In other words, administrative and other woes of the industry are unaffected by the salutary cuts in corporation taxes. This by no stretch of imagination can translate into a greater economic activity, though it can certainly mean higher profits for promoters and, if fortunate, even shareholders. It is notable that our corporate bigwigs instead of sincerely reciprocating the gesture of the finance minister are already exploring ways to game the new tax slabs for greater greed rather than for greater social benefits.
Reports in a section of the media that companies with blueprints ready for fresh capital expenditure and expansion are now revisiting their plans, proposing to set up new companies after October 1 in order to pay only 15 per cent tax as against the much reduced 25 for existing companies. Of course, this is legit but it lacks appreciation of the spectacular move by the government to help the industry regain traction in a highly competitive environment. Greed and selfishness are natural instincts but the Indian business community is notorious for cutting moral and legal corners.
If in the benign tax arrangement the industry fails to rise to the occasion it will have no one but itself to blame. Demanding concessions without fulfilling its own role and failing to contribute to the economy can now have a popular backlash since the government might have little else to offer aside from getting rid of some administrative and implementation irritants. Meanwhile, the reports of a bonanza in the personal income tax sphere following a draft new legislation on direct taxes would make fiscal purists sit up and take note of the extent of taxes foregone in the hope of higher collections due to hoped-for enhanced productivity and growth.
Apparently, the IT panel has suggested four slabs, with no-tax threshold raised from the current Rs 2.5 lakh a year to Rs 5 lakhs and an annual income of Rs 2 crores attracting 35 per cent tax. In what form the IT cuts will emerge is still unknown but it is clear that the government in its current mood is set on offering incentives to stakeholders in the hope that they would help prevent the slowdown and, instead, bolster the tax kitty by paying their dues in ever larger numbers than at anytime before. If experience is any guide, it is a vain hope－we will take the tax cuts without being overly concerned about expansion of economic activity and/or boosting public revenues.