How can the Indian economy revive after the corporate tax cut

What will it take for growth to pick up? ET looks at key questions and factors.

By ET Bureau | Updated: Sep 25, 2019, 06.20 PM IST

Corporate tax cut: Key positives from mega reform

1. WILL INDIA INC STEP UP?
A] Large Dividends
BSE 500 companies may be able to save Rs 20,745 crore in tax outgo on a quarterly basis

Best case scenario
This extra cash may be given out as dividend, which could boost consumption

B] Corporate Investment

Low capacity utilisation and high debt have held back investments
Q1 capacity utilisation was at 76% BSE 500 companies’ total debt rose at a CAGR of 7.6% between FY14 and FY19
Cash and equivalents grew just 1.3% annually to Rs 8.4 lakh crore

Best case scenario
Bigger profits, possible demand recovery and low 15% tax rate may encourage investments, especially by foreign investors in new manufacturing units

Higher profits would allow companies to retire debt or raise fresh funds for investment

India Inc’s total debt has increased faster than the cash on books; current liabilities, too, rose faster

2. NO FISCAL DRAG

FM has ruled out expenditure cutbacks
Says focus on divestment programme to raise funds
Infrastructure spending to be frontloaded; one or two more sets of stimulus measures coming

Best case scenario
No immediate risk of spending cuts dragging down growth

3. CHEAPER CREDIT?
RBI has already lowered repo rate four times this year

May effect 25 bps-plus rate cut in October policy
Banks have to implement RBI’s Oct 1 deadline for external benchmarking of loans
Govt has asked state-run banks to give out more consumer and MSME loans

Best case scenario

Big signal to banks to pass on lower rates, lending rates fall appreciably, consumption demand and MSME activity go up

4. BOOST FROM MARKETS?

Corporate tax cuts and abolition of FPI surcharge have energised markets
Investors attracted by better future bottom lines and EPS (earnings per share)
Indices expected to rise till year-end

Best case scenario

Rise in markets may have a wealth effect on consumption; IPOs and disinvestment may be easier; higher FPI participation may have real economy impact by encouraging greenfield foreign investments