Charvak Thatha DP1
The Indian economy has slowed down after two decades of growth. The annual growth rate has decreased and the economy has slowed down. This is an issue due to the fact that the country has one of the fastest growing populations in the world and to employ the upcoming generation of youth, the GDP must be much higher to absorb such a large number of people into the workforce. If this issue is not solved, the recession will lead to many things that will further weaken the economy as well as the livelihood of its people. So what is the government doing about this? One of the major steps being taken is by finance minister Nirmala Sitharaman who initiated a series of tax cuts. But the question to be asked is whether these tax cuts will actually help.
Firstly, what is a tax cut? It is a sharp decrease in the taxation of a legal entity. In India, the corporate tax (which is tax applied on a company’s income) sat at around 30% until quite recently. This caused companies to sell their products and services at a higher price to make up for the profits that they lose through taxation. The high taxes also make the Indian market unappealing for Foreign Direct Investment. This hinders money from flowing into the country and limits reserves of foreign currency. Now, this 30% tax has been slashed down to 22% to encourage consumption. This lower tax will allow companies to lower their prices which theoretically will increase consumption as a result of market mechanics. These increased sales would in turn funnel more money into the government through the taxes and increase growth.
Furthermore, Nirmala Sitharaman has initiated several tax cuts for all manufacturing units newly entering India. This tax was previously at 25% which is abnormally high when compared to other countries like Vietnam with 22% and Indonesia with 23%, both of which are nations that have a highly productive manufacturing sector. These high taxes discourage companies from setting up manufacturing units within India as it will leech away at their profits. However, to encourage such companies to come to India and start manufacturing their products here, the 25% tax has been cut down to 15%, which is the lowest tax on manufacturing units anywhere in the world. This is meant to increase the prominence of the manufacturing sector in the country and reduce dependence on the agricultural sector.
An added benefit to India is the trade war between China and America. Due to the heavy sanctions that the Chinese government is placing on MNCs in their nation to make up for the lost revenue of losing the American market, companies are unwilling to do business in China as it is causing more harm than good for them. These companies are leaving China and searching elsewhere for business, and many analysts argue that India will become the new manufacturing hub. However, taxes are not the only thing to consider when looking for a new country to do commercial activities in. One of the major factors to consider is how conciliatory the environment is. In countries like Vietnam and Indonesia, labour laws and approval processes are efficient and friendly towards manufacturers. In India, labour laws are rather cumbersome and the environment itself is not favourable or friendly towards manufacturers.
The Indian economy, although one of the fastest growing in the world, has once again entered an economic slump and to solve this issue, the tax cuts have been put into place. Although they may seem well in theory, there is no guarantee that they will actually function in reviving the Indian economy due to a number of factors. The question here is, should the Indian government rely entirely on the new tax schemes, or actually change the laws and procedures that matter to increase business?