Tax cuts necessary but India needs more reforms, says CEA
NEWDELHI: Corporate tax rate cuts are necessary but not sufficient to stimulate investments, for which the country needs more reforms, chief economic advisor (CEA) Krishnamurthy Subramanian said on Tuesday.
The CEA said corporate tax cuts were announced to make India attractive for investors in the face of competition from Thailand, Vietnam and China. “Tax rate cuts are necessary, but are not necessarily sufficient conditions for attracting investments because investors look at aftertax returns,” he said while arguing for more investments.
The government in September announced a lower 22% corporate tax rate for domestic companies that do not avail of any tax breaks and a 15% rate for new manufacturing firms.
“We do need more reforms to enhance productivity in the economy, what economists call the incremental capital output ratio, which is about how many units of capital one needs to bring in to produce one unit of output. That is something that is dependent on reforms. The steps being taken are articulating this vision that we need reforms to unshackle the entrepreneurial spirit of the country,” Subramanian said at a conference on education organized by the Federation of Indian Chambers of Commerce and
Industry in the capital. He said the reforms being undertaken are with a vision “with private investment at its core”.
The CEA said reforms are required to further unleash the entrepreneurial spirit of Indians and attributed the current economic slowdown in the country to a decline in private investment related to the problems the financi al sector has been going through. Indian banks are now trying to turn around failed businesses by roping in new investors under the supervision of bankruptcy courts, while non-bank lenders have been grappling with a liquidity crunch.
“One clear policy option to hasten the recovery process could be a direct and strong demand-push injected into the economy,” said DK Srivastava, chief policy advisor to EY India, in an analysis of the economy.