Corporate Tax Cut and Economic Growth

There have been lots of concerns about the economic situation in India in the recent past. The concerns were hastened by the reality of the slower GDP growth achieved in last quarter. Since the realization sank in after the presentation of the annual budget by the finance minister Smt.Nirmala Sitharaman and with the gradual emergence of signals of a deep slowdown of the economy, the finance minister has been making lots of initiatives to boost the economy like additional incentives to boost exports, cheaper loans, loan melas, and the like  and the latest, adding a sweetener in the form of a cut in corporate taxes.

I am not an economist in the strictest sense to make  comments on some of these measures which are directed at beating the slow down. Of course, some of the measures may help but by and large the measures seemed to have been taken in a haste. Why I say this is because the honourable minister and her team don't seem to have considered the real problem. It is not lack of funds availability on the part of lenders , it is not that corporate tax rates are high; it is lack of demand for products manufactured by corporates (Bizarre stories like decreased demand for even undergarments make rounds to depict the state of demand.) What will create more demand? Ability of the consumers to buy more goods. This requires that either they have more money with them to buy more goods or with the available money they are able to buy more of the goods which necessitates that producers lower the prices of their goods.

Now, the pertinent question: Will there be a perk up in demand consequent to a reduction in corporate tax rates? Yes, if the corporates pass on the benefits of lesser tax rates to the consumers and/or employees. Yes, also if they generate more jobs for working class by starting new ventures to avail of the lesser tax regime. But, it might please be remembered that job creation does not happen overnight, if at all it takes place. Most likely the promoters will use the benefit of reduced tax for creating new enterprises with the sole aim of garnering more wealth and in the case of existing companies to declare more dividends and to pay larger executive compensations(with them being the important beneficiaries for both).And entrepreneurs are less likely to invest in long gestation and labour intensive projects as these may not benefit them in the short run. And, please remember that they know that if finance minister could incentivize with a tax cut today, she can dis-incentivize  by restoring it any time in future.

What the government should have done was  to use the same amount of money(something like Rs.1,45,000  crores ) to initiate infrastructure projects which would have created more jobs which in turn would have resulted in the labour class having more disposable income with them, which would have led to a perk up in demand for almost all products. This is what great economist John Maynard Keynes suggested in the 1930s and what Barrack Obama did successfully to overcome the severe  recessionary trends in  US  during 2007-09.

Or else, the government should have reduced the tax rates for individuals, rather than the corporates to leave them with more disposable income.

What Mrs.Sitharaman did would definitely enthuse stock markets and its beneficiaries, but may not lead to an immediate economic recovery. Please remember that stock indices are considered to be leading economic indicators and a spike in the index need not be even an indicator.