Finance Minister Nirmala Sitharaman in Union Budget 2019-20 had set a target of 3.3% of the GDP for fiscal deficit. However, on Friday after the proposed cuts in corporate tax rates to boost manufacturing and attract investments with the aim of reviving the economy, the fiscal deficit target of 3.3% is all set to widen.
Finance Minister Nirmala Sitharaman on Friday announced that domestic companies will pay 22 per cent corporate tax from April 1, 2019, instead of 30 per cent earlier. Currently, the total corporate tax after surcharges and cesses is about 34.94 per cent, which has been cut down to 25.17 per cent. New domestic companies incorporated on or after Oct 1, 2019, making fresh investment in manufacturing can pay income-tax at a rate of 15%; the earlier rate was 25%. The revenue foregone due to reduction in corporate tax and other relief is estimated at Rs 1.45 lakh crore.
This move aims to make India a global manufacturing base and to boost the ‘Make in India’ initiative and at attracting companies and business opportunities that are shifting away from China. This has provided a booster dose to the Indian manufacturing exports and FDI which had stagnated.
This gamble of the government risk a rise in inflation and a weak rupee. This has sent the India 10 year government bond yield rising to 6.8%. An important question that needs to answered is how is the government is going to finance the corporate tax cut. Will it be financed through debt or newly printed money or helicopter money?
On the other hand, the equity market continued its euphoria over government's economy-boosting measures. The benchmark BSE Sensex soared over 1, 900 points on Friday and by over 1,100 points to reclaim the 39,000 mark on Monday, driven by gains in index heavyweights HDFC Bank, ITC, L&T and ICICI Bank.
