Rejig the whole tax structure to boost demand, not just Corporate Tax


Rising costs led by an increase in bank, power and fuel charges; high taxes and loss of jobs have led to a fall in demand and this needs to be addressed immediately. It is an induced inflation, whatever the indices might say, amid perceptible slowdown. Commodity prices are rising, incomes are falling and policies like the new Motor Vehicle (MV) Act, atrocious banking policies and transport tariff– whatever the officials may say — are adding to the problem.

The rising power charges in states like Uttar Pradesh (UP) are causing price rise and slowdown, even in agriculture.

The Non-Banking Financial Companies (NBFCs), which are the key lenders to the micro small and medium enterprises (MSME) are in the middle of a severe cash crunch owing to a massive loan default by the road toll collectors of IL&FS. Officially it lost Rs 91,000 crore in 2018. This, in turn, has dealt a huge blow to the micro-financing institutions.

Now, the virtual closure of the Punjab & Maharashtra Co-operative (PMC) Bank exposes the threat in co-operative sector as well. The modus operandi is almost similar to that of IL&FS.

The latest Asian Development Bank (ADB) assessment has further brought down its projections for India’s economic growth rate. From a 7% estimate, it has brought down the growth estimates to 6.5% for the current financial year.

During the April to June quarter of this financial year, GDP growth rate touched 5% — lowest in six years.

Prime Minister Narendra Modi is trying his best to lure investors. In his recent tour to the US, he met several American CEOs and other leaders to boost investments. One needs to understand that these measures will take time to get translated in action.

Even the country’s richest are melting, according to Hurun India Rich List 2019, their cumulative wealth dropped by Rs 3,72, 800 crore. It says 344 individuals or almost third witnessed wealth reduction and another 112 could not meet the cut-off of Rs 1,000 crore, about half of last year.

The list indicates tough competition among the rich as also that they are hit by the slowdown.

In short, the slowdown is more encompassing.

Finance minister Nirmala Sitharaman, despite defending policies finally agreed to reduce corporate tax rates to 25.17% from an effective 35%.

It is a welcome move but has come a bit too late.

Overall the Indian corporate sector had been paying 48.3% taxes, according to OECD, including tax on dividends it pays to its shareholders, who also pay another tax on it. It’s tax on tax and it continues.

The problem is individuals falling in the high income group still have the highest rate of tax at about 42.5%. With other indirect taxes including the Goods and Services Tax, an individual pays over 70% of their income as taxes. Could the economy do better with less than 30% of earnings citizens are left with?

Atrocious tolls, parking charges, passenger taxes add to the woes. There are also extortions on the road – it is by the insurgents in Nagaland and some other North-Eastern states or “suvidha shulk” by law enforcing authorities in other places. Somewhere the country is unable to understand its economics. The government expenditures increase and business gasps for its inability to recover the basic cost.

Despite easing of norms, no poor can dare do a simple business unless he can create the warmth for the law enforcers – municipal, panchayat or state. This is despite efforts by Modi to root it out. The sufferers says that his stringency has only led to rise in rates as “risk for perpetrators grow”. Even the corporate or even small businesses or educational institutions are not free from it.

Naturally the crisis continues. The latest RBI annual report 2018-19 (FY 19) confirms the difficult path. The supposed relief of Rs 1.45 lakh crore that the government received from Reserve Bank of India is mere academics.

The collapse of industries such as automobile, textile and diamond with a lack-lustre performance by the IT sector, rising non-performing assets (NPAs), tightening of banking charges and norms, failing manufacturing sector and sluggish consumer demand leads to deceleration. As eight core sector growth slowed, wage losses have become more pronounced.

In short, there is cash crunch. It is affecting the rural, farm and wholesale sectors. The forced government rules of transacting through banks is delaying deals and adding to the cash crunch.

India has not learnt from either the European or the US sub-prime crash of 2007-8.

The Indian system needs cash lubrication, which in the wake of demonetization has been drying up. Shubhada Rao, chief economist of Yes Bank recently said that people need to have cash for the supply-side changes to yield benefits. She noted that the spree of job losses along with high unemployment has led to the fall in demand. This is the key reason for the current economic slowdown.

Expecting demand to pick up in such a scenario is a wishful thinking.

A cocktail of short and long-term measures are critical at this stage to boost demand pick-up. The mix has to include easing of taxes as also a detailed discussion with all stakeholders, including members of the opposition parties and the common man. The opposition party members too need to be more responsible and mere government bashing would not do.

The NITI Aayog has to take a lead in generating new thoughts and formulate a people-oriented policy. It is important to include more and more people from the industry to not only reflect the problems but also for revival prescription.

Yes, it is a tough situation but then with right policy measures it has to be revived. Deliberations followed by well-thought out policy measures will put things back on track. It is not too late.

(The opinion expressed in this article is that of the writer and does not reflect the policies of News Intervention)

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