Finally, the Modi government has acknowledged that the budget presented on 5 July 2019 was a failed, vapid policy document.
Finally, it has realised that India’s private enterprise is the most potent engine of economic growth, accounting for over 90 percent of GDP.
And finally, after six excruciating years, it has shed its “I am the government and I can fix everything” stance and adopted the mantra of “I will free your animal spirits by empowering, trusting and enriching you.”
Finally!
The fiscal giveaway is an awe-inspiring 0.6 percent+ of GDP. Absolutely, it’s a generous Rs 1.45 lakh crore of additional cash created on corporate balance sheets. Optically, it’s a humongous 10 percentage points’ hack of the corporate tax rate by one swing of the axe (reminiscent of P Chidambaram’s audacious move in the “dream budget” of 1997/98 – ouch!).
Yes, I am delighted. But no, I am not ecstatic. Why? Listen to the podcast for the reasons.
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[00:00:00] Rise Above The Din Unbox The News With Me, Raghav Behal Finally, finally, the Modi government has acknowledged the futility of trying to pump prime India's GDP by ever escalating, ever increasing government expenditure, which incidentally increased by a very astonishing double digit compounded annual growth rate
[00:00:23] and gagger over 6 years of very, what can I call lackluster important sort of growth. Remember, remember Indian governments are very limited because they drive only 10% of our economy and of course what's worse is that they do this quite inefficiently and quite bluntly.
[00:00:41] Finally, the Modi government has also acknowledged that the budget presented on the 5th of July 2019 was a, in retrospect, a failed document. Finally, it has realized that India's private enterprise is the most potent engine of economic growth.
[00:01:01] It accounts for over 90% of our GDP and finally after 6 excruciating years it has shared its I am the government and I can fix everything stands. Instead, it has adopted the mantra of I will free your animal spirits. I will empower you. I will trust you.
[00:01:21] I will enrich you. Finally, well the fiscal giveaway is quite an awe inspiring 0.6% plus of the GDP in absolute numbers. It's very generous rupees 1.45 lakh crore of additional cash created on corporate, on companies balance sheets. Now, optically it's a very large, it's almost a humongous 10% points.
[00:01:50] I'll repeat that 10% points hack of the corporate tax rate in one swing of the ax and you know this is quite reminiscent of you know who? P. Chidambaram's audacious move in what was called the dream budget of 1997-98 and
[00:02:08] ouch this one is going to hurt the Modi government. A P. Chidambaram budget. Yes, after all of this has happened I am delighted but no I cannot say that I'm ecstatic. Now why? Why am I not ecstatic? Here are three reasons.
[00:02:25] You know large Indian companies have never, never quite paid the peak rate of 35% plus percent. Most utilize a rather welter of complicated exemptions to pay you know at best anywhere between 18 to 29% tax on profits.
[00:02:43] Therefore if the profit tax has now been cut to about 25% they could end up saving no more than 2 or 5% of the profits. Now to put it in perspective think of a company which is earning about 50,000 crore rupees of pre-tax profits.
[00:03:00] Now that company will have an additional rupees 1000 to 2500 crore to play with. That's not a piffling sum of money. I concede but neither is it so revolutionary. Two, will this ignite a consumption boom? Now here is where I track away from all this euphoria.
[00:03:23] The government has chosen to give additional cash to companies but not directly to consumers. Now this cash will of course ultimately reach ordinary people like you and me but in a very sort of convoluted way.
[00:03:38] You know when companies cut product prices or declare dividends or they buy back their shares or they invest in new projects and of course there will be leakages along the way. Having said all of this I still concede that this cascade of cash which is going through
[00:03:56] the economy deserves applause deserves to be applauded even if it's not you know a roar or a thunder clap. And number three, so was there a better way of injecting this stimulus? Yes, yes there was.
[00:04:12] Imagine if the cash was squatted directly into consumers pockets you know rather than meandering its way to them as I have just described. Now how could that cash have gone straight into the consumers pockets?
[00:04:26] Well here's how 1.45 lakh crore would have given a much bigger boost imagine if the government instead of giving more cash to companies had cut the following taxes which would have enriched ordinary folk once again like you and me directly and immediately.
[00:04:46] One abolished the 28% GST slab for most key items including cars. Now with one stroke popularly purchased items would have become materially cheaper 10% cheaper and that would have kick started you know what's called the virtuous consumption and investment cycle.
[00:05:07] Two, what if the government had abolished the long term capital gains tax and equities? Now this was something that existed before the Modi government slammed a hostile regime on risk capital. If they had abolished long term capital gains tax this time in one go a previous injustice
[00:05:30] would have gotten undone and that would have made equities sexy once more. Three, what if they had abolished the dividend distribution tax? Now this would have killed the you know hugely unfair double taxation of dividends
[00:05:45] that exists in India because dividends are taxed in the hands of the companies and once again they are clubbed with shareholders incomes and taxed again. So therefore this had been done investors would have instantly got more cash to spend and more cash to invest.
[00:06:00] Now while we could not figure out what the revenue loss would be if these three taxes that I've just spoken about if these three taxes were cut and not just the corporate
[00:06:10] tax rate as the government has said my bet is that the loss would still be in the vicinity of 1.5 lakh crore you know give or take a few thousand crores which is quite quite immaterial when you are mounting change on this scale.
[00:06:25] What's more I can bet my last penny that the consumption and investment impact of these three tax cuts that I've spoken about the long term capital gains tax the dividend distribution tax and the GST 28% slab if these had been cut that would have put
[00:06:42] cash directly in the hands of ordinary people once again people like you and me and that would have created a multiple impact compared to what will eventually be achieved by the current cut in corporate taxes that the government has done.
[00:06:55] Now I bet my last penny is any taker for this wager especially in the ministry of finance on Raisin Ahil take me up thanks for listening tune in next week for another episode of Raghav's Take.