The mounting pressure of a sagging economy and sharp economic growth forecast reductions by global institutions, the Government of India announced significant tax relief to corporates. However, while this seemed to cheer the industry and may be a stimulus in the short term, experts have warned of the financial risks in the long term.
Corporate Tax Rate Slashed
The Government of India recently announced a big reduction in income tax rate for corporates. The government has slashed basic corporate tax rate to 22% from 30% if a company does not seek any exemption or incentives, while for new manufacturing companies it has been cut down to 15% from 25%.
Over the past few weeks, the government has been announcing a series of measures to boost growth that had fallen to six-year low of 5% in June quarter. Revenue foregone for the reduction in corporate tax rate and other relief measures announced today will cost the government ₹1.45 lakh crore per year, the finance minister said.
However, Moody’s subsequently said that while corporate tax reduction is credit positive for companies because it will enable them to generate higher post-tax incomes, it is credit negative for the sovereign, as it aggravates mounting risks for the government in meeting its fiscal deficit target, it said.
ADB Reduces Growth Forecast.
The Asian Development Bank (ADB) has revised its outlook for India’s economy, with growth now expected at 6.5% in fiscal year (FY) 2019, following weaker expansion in the first quarter of the year with slower growth in consumption and investment affecting the manufacturing and service sectors.
India’s fiscal year starts on 1 April and ends 31 March of the next calendar year. In an update released recently of its flagship economic publication, Asian Development Outlook (ADO) 2019, ADB says that proactive policy interventions along with a recovery in domestic demand and investments will likely see the economy pick up in FY2020, growing by 7.2%. In July, ADB had forecast 7.0% growth for FY2019 and 7.2% in FY2020, as reported by Asia Law Portal.
“India will remain as one of the fastest-growing economies in the world this year and next year as the government continues to implement policy reforms and interventions to strengthen economic fundamentals,” said ADB Chief Economist Mr. Yasuyuki Sawada. Significant corporate tax cuts, announced by the government, will uplift private investment, including foreign direct investments, and enhance India’s global competitiveness. Bank recapitalization, support measures for nonbanking financial companies, and cuts in monetary policy rates should improve the health of the financial sector, while increasing the credit flow to industry and infrastructure projects.
IMF on Slowing Economy.
Again, we’ll have a fresh set of numbers coming up but the recent economic growth in India is much weaker than expected, mainly due to corporate and environmental regulatory uncertainty and lingering weakness in some non-Bank financial companies and risks to the outlook are tilted to the downside, as we like to say.
And, you know, we’ll be monitoring that, as I said. We will update that assessment in the upcoming World Economic Outlook. Asia Law Portal had reported that IMF’s last published World Economic Outlook, July 2019 mentioned that India’s economy is set to grow at 7.0 percent in 2019, picking up to 7.2 percent in 2020, which was lower than its previous forecasts.
OECD Lowers Growth Further.
The Organisation for Economic Co-operation and Development (OECD) recently released its Interim Economic Outlook, which helps evaluate the extent to which projections and analysis from the OECD’s May 2019 Economic Outlook are still on track. The report mentioned ‘Developments in many emerging-market economies were also softer than projected, including in India…’ The interim projections forecasted India’s GDP growth rate at 5.9%, a sharp decline of 1.3% from the forecast in its May 2019 Economic Outlook (reported by Asia Law Portal).
The report further states ‘GDP growth in India has proved surprisingly weak in recent quarters, with consumer spending having slowed and tight financial conditions restraining investment. Growth is expected to strengthen from around 6% in FY 2019 to just over 6¼ per cent in FY 2020. Lower interest rates and stronger benefits from reform efforts should all help private sector demand to strengthen.’
FPI Registration Norms Relaxed.
Easing the regulatory framework for foreign portfolio investors (FPIs), SEBI has simplified KYC requirements for them and permitted them to carry out off-market transfer of securities. Besides, the regulator has broad-based the classification for FPIs and simplified their registration process. The notification comes after the board of SEBI in August approved a proposal to simplify the regulatory norms for FPIs. Under the new framework, FPIs would be classified into two categories instead of three.
At present, SEBI has classified FPIs into three categories with the easier compliance norms for Category-I FPIs and the strictest for Category-III FPIs. The most well-regulated FPIs come under Category-I.
As per the new rule, the government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organisations or agencies including entities controlled or at least 75 per cent directly or indirectly owned by such government and government related investor; pension and university funds would fall under the Category-I FPIs.
India in World Bank’s Top 20 Reformers.
India has been featured in the World Bank’s recently released list of Top-20 improvers in Doing Business 2020, improving the most on ease of doing business score. Economies are selected based on the number of reforms and on how much their ease of doing business scores improve.
The list does not reflect the best performing/rank economies, which will be disclosed at the time of Doing Business 2020 launch on October 24, 2019. The list mentioned that authorities in Mumbai and New Delhi made it easier to obtain construction permits by allowing the submission of labor inspector commencement and completion notifications through a single-window clearance system. Starting a business is less costly thanks to abolished filing fees for the SPICe company incorporation form, electronic memorandum of association and articles of association.
Exporting and importing is also easier following the integration of several government agencies into an online system and the upgrading of port equipment and infrastructure.