Big bang reforms in India to revive the economy
Friday the 20th of September was the day it finally happened. After watching the economy slow to its lowest growth in the last 6 years, Prime Minister Modi could sit still no longer.
Prime Minister Modi needed to do something to revive the economy. And something he did. In the tax cut package revealed on Friday, India announced they will slash taxes on all corporates by 10 per cent, from 35 to 25 per cent. New manufacturing corporations will pay even less – they will get away with a tax rate of only 17 per cent.
New manufacturing corporations will pay a mere 17 per cent in taxes (Source: UBS)
The reduction in corporate taxes ought to impact India massively
India has been relatively noncompetitive compared to its Asian peers the latter years, but should now – with the lower tax rates – see higher capital expenditure. FDIs should also increase as international companies look for new venues to set up manufacturing facilities in order to diversify risks emanating from the trade war between China and the US. The tax rate for new manufacturers will surely improve return metrics and generate enough profitability to bring back the animal spirits amongst Indian and foreign entrepreneurs.
The tax rate will surely bring back the animal spirit amongst Indian and foreign entrepreneurs
It is not only the economic growth that has been slowing in India. Demand growth has also fallen to low levels. To counter this, the Indian government has taken steps to boost demand by kick starting credit growth, improving the liquidity for small- and mid-sized enterprises, and increasing government expenditure. The central bank has also (independently) cut interest rates and is expected to continue reducing them.
We may see additional reforms in the near future too. Local media reports that the government may undertake a new round of privatizations to minimize the fiscal impact from the lower taxes.
