Government Should Slash Income Tax Rates To Push Growth

As was largely expected GDP dipped below the 5 per cent mark and that too by a distance. At 4.5 per cent, the number came in at a 6-year low, pushing for the RBI to cut interest rates further.

Should the government slash income tax rates to boost growth?

The cutting of corporate tax rates was not a very good idea. In fact, the government should have slashed income tax rates in place of corporate taxes. The hopes are that the savings from corporate tax rate cuts would push companies to invest and hence a boost to private sector investment. This is unlikely to happen when demand has actually collapsed. Why would a corporate want to invest when the demand environment remains exceedingly poor?

In place of a corporate tax rate cut, which has now made a hole in the government's coffers by a mammoth Rs 1.4 lakh crores, the government should have cut personal income tax rates. This would have ensured additional money in the hands of individuals, which could have boosted spending and hence demand. A corporate tax rate cut is unlikely to have the same cascading impact like a personal income tax rate cut. You cannot have a situation where the peak corporate tax (25%) rate is almost half of that of the personal income tax rate (peak rates at 42.7%).

The fiscal deficit rate targetted at 3.3 per cent for 2019-20 is most likely to be breached, and even for the next year the position is precarious. It's unlikely that a cut in personal income tax rates would come through even next year, because of the fiscal deficit situation.

In fact, the government does not have any elbow room now to cut tax rates any longer. One of the possibilities would be to again go for a hike in corporate tax rates, while cutting income tax rates. However, that is unlikely to happen, as it would mean a loss of face for the government.

No light at the end of the tunnel

Every high frequency indicator including core sector growth, auto sales, IIP data shows that growth has collapsed. No one can for sure say that the GDP numbers have bottomed out. It would be interesting to watch for the auto sales numbers in the month of Nov, which are likely to be dismal once again.

The Reserve Bank of India on its part is likely to cut interest rates again in the month of December. It has been doing so for many quarters now, without any results. This has not helped growth rebound in anyway and one wonders how effective the interest rate tool really is. With inflation also rearing its head, the room to cut interest rates drastically is limited.

Many corporates have already started slashing jobs and if we have a slowdown across the globe, it would only precipitate a crisis further. All in all, it looks like we are headed for difficult times. The government would have to start thinking out the box and increase spending, even if it means the fiscal deficit number is breached.