Union Budget 2018: Corporate Tax Cut Need Of The Hour, Ficci President Rashesh Shah Says

The government should prefer implementing a corporate tax rate cut over increasing spending in rural economy.

Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The government should target a reduction in corporate tax rates, as opposed to increasing its spending in the rural economy in the upcoming Union Budget 2018. That’s the view from industry body Federation of Indian Chambers of Commerce & Industry President Rashesh Shah.

With the recovery in private capital expenditure still a few quarters away, a corporate tax rate cut will help spur the ‘animal spirits’ in the economy and lead to higher investments, Shah told BloombergQuint in an interview.

Citing the U.S. tax overhaul bill which lowered the corporate tax rate to 21 percent from 35 percent earlier, Shah said “since we are living in a ‘connected’ global economy, governments across the globe should follow up and implement rate reduction in their respective nations too.”

While businesses always have the option of borrowing to increase their investment, it is the retained earnings that determine the ‘risk capital’ of firms, explained Shah. In the current backdrop of strong global growth and a tentative recovery in India’s growth, a corporate tax rate cut would go a long way, he added.

Corporates are eventually geared towards investment. When you cut tax rates, the retained earnings go up, which are then available to corporates as their equity contribution for new projects.
Rashesh Shah, President, Ficci

Factors To Watch Out For In Budget 2018

  • Growth And Fiscal Outlook

Economic indicators at the micro level hint at a pick-up in growth, said Shah. With a “fairly benign” global economy, he expects exports to play a crucial role in boosting growth. A fiscal deficit of up to 3.5 percent of the gross domestic product in FY18 would be acceptable, according to Shah, with higher crude oil prices acting as a strong headwind.

He would also closely monitor the government’s roadmap to raise non-tax revenue through strategies such as divestment and asset monetisation.

  • Jobs Versus Employment

Historically, India has largely been concerned on inflation, corruption, growth and investments, Shah said. However, the government needs to focus on investments that leads to job creation, he added.

Additionally, the distinction between jobs and employment needs to be made, as India is seeing a surge in self employment activities as well. “Gig economy is underway,” he said.

  • Resolution Of Bad Assets

He expects nearly a quarter of the insolvency cases admitted before the National Company Law Tribunal to be resolved by the end of 2018. With banks having completed a large part of the provisioning process, the resolution process is taking shape now, he added.

  • Financial Sector Reforms

The banking sector needs a holistic approach to reforms that encompasses not just banking, but the financial sector in large. “We are moving away from a bank-centric financial services structure to a structure where banks play a role along with NBFCs, ARCs,” he said.

Here are edited excerpts of the conversation:

What is the hardest decision you think that the government should take this year?

The hardest will be whether to maintain the fiscal consolidation path or allow that to slip a little bit. I think upto 3.5 percent of GDP is okay. I don’t think we need to get to 3 percent of GDP given the year we are in. Remember, there is strong headwind in the form of oil price hike. Oil price impacts current account deficit, government’s fiscal spending ability. Given that, going up to 3.5 percent of GDP in a year like this while maintaining the investment and spending push is going to be very important.

What about credibility? You have to be very careful about what circumstances you are willing to breach that rule. The more often and easily you will breach the rule, the less your credibility in the global markets.

Absolutely. This government has maintained the credibility. We have seen that in the last three years, they have maintained their path of consolidation but there are headwinds. It is not that they are going from 3.2 percent to 5 percent. They are instead going between 3.2-3.5 percent which is in the range. Between 3-3.5 percent, the world investors should largely be indifferent. There might be a short-term shock to some people, but I don’t think there is a real risk to credibility in this range. At 3.5 percent, the equity investors will be very happy, but the bond investors will not be.

If the government comes in below 3.5 percent this year, then that could be a good surprise for the bond market. Right?

The bond market is already ahead of the curve. Bond market is not looking at government fiscal as the main parameter. They are looking at oil price, an uptick in inflation, RBI stance on inflation and what the MPC is expected to do. So, the bond market has already factored in all this. It is already done. The bond yield has gone up by 80-90 basis points. So, this has got priced in already. It is easier for the government to be a little bit flexible on that and not be hard nosed. If it comes at the cost of growth, then it is not worth it.

What do you think the priority should be as the government also has to address the jobs’ issue?

Historically, jobs have been an important factor but not the most important factor when it comes to elections. Elections are fought on corruption, inflation, growth. Jobs effect about 8-10 million people while corruption and inflation have a much larger audience. Jobs is one of the biggest problems we need to crack. It is not easy to crack but we need to crack it. Also, there is a difference between jobs and employment. In India, there is self-employment getting created. Are we measuring jobs or employment is one of the larger questions which we have to grapple with. A lot of people who are self-employed and with the gig economy underway like Ola drivers, it is very hard to figure out where we are on jobs and employment. Our data is fairly broken. Unless we get clear data, we will have to depend on anecdotal stories. I don’t think the issue is a real concern, but the larger concern will continue to be issues like inflation, corruption, investment, growth, as they affect larger people of 300-500 million people while jobs will affect 8-10 million people.

If you had to choose between a corporate rate tax cut and breaching the fiscal deficit target due to increased spending in rural economy, what will you choose?

I would pick the corporate tax cut because the government has been promising that for a while. Also, with the U.S. tax reforms, the U.S. has cut corporate tax rate in a significant way and we expect that it will be followed through by major countries because we are part of the connected global economy. Given that, we being at 30 percent, and that 30 percent going down to 25 percent is something that we’ll have to do. It is not a complete giveaway by the government because there are some concessions which are still underway, and will also go away. When we add up the whole thing, then what the government will give up will not be large. If that gap comes from increased fiscal deficit then it is a good tradeoff to make because it will be growth oriented.

We think capex is couple of quarters away. So, a cut like this will spur the animal spirit as the animal spirit is starting to come back. When we see the action on NCLT cases, there are 4-5 bidders for each asset and the bidders are willing to pay the full price. Earlier there were apprehensions that people will try and pay distressed and liquidation value prices. We are seeing full prices coming in from steel, cement and power assets. So, the animal spirit is just getting unlocked. I think the economy is on an uptick. We have absorbed the demonetisation and GST disruption. It is starting to come back. At this time, a cut in tax rate, even from 30 percent, if we don’t go to 25 percent but at 27.5 percent, then it could give a big boost.

Are companies willing to put money to work by building new plants at a time when there is so much surplus capacity?

Eventually, corporates are geared towards investments. For many companies, their main job is to give money back to their shareholders. Companies exist because they want to grow in order to spur the animal spirits and risk-taking behavior. I agree that capacity utilisation has been a big issue, but global growth is coming back, exports are on an uptick, consumption cycle is reviving. The large concern for capex has never been their ability to borrow, but the availability of equity. When you cut tax rate, the retained earnings go up and they are available as the equity contribution for new projects. You have to put equity and then you can borrow. Borrowings are available, but you need to have retained earnings. When the animal spirits are unlocked, then the risk capital is available. So, the equity that you raised from outside or the equity from retained earnings is called risk capital available for corporates. We need to expand the risk capital which is available, so that they can use it and start taking risk. We are a couple of quarters away from there because the animal spirits are coming back, growth is inching back, the global economy is doing well, so all the ingredients are in place. At this stage giving a small boost and push, which was expected as it has been over the years, would be very beneficial.

Do large corporations need the hand holding right now or is it the smaller players?

It is an ongoing challenge. Whenever we frame a question in an either/or, like should you give more money to a malnourished kid or to corporates for investment, the debate gets very difficult to conclude.

But resources make it either/or.

It is not either/or. The job of the Finance Ministry to strike a balance, because we are also talking about jobs. Companies invest money, they expand, then jobs get created. When jobs get created, people will buy houses and cars. It will have a spin-off effect.

Why is the transmission of the benefit of government policies to the citizens of this country so slow in India?

Transmission by the banks happens very quickly but only on the upside. So, half of the transmission happens, and the other half doesn’t happen. But the economy is interconnected and there are linkages within the economy, so the answers to such questions are more complex. That’s why striking a good balance between corporate investments, rural investments, rural consumption being spurred on is important. I’m not saying that just give away all the money to the corporates, although they need to invest, if not today but a year down the line because since the last few years, government investment has been driving consumption in the economy. This is an economy which cannot continue at this pace and without corporate investments coming in. So, we have to think of all the ways we can afford it.

Why do you need an incentive to create jobs?

The reason is you can invest in industries which don’t create jobs but are still investments and you can also investment in industries which actually create jobs like textile and housing. The other industries which not create jobs have a much automated process. In India, we have celebrated GDP growth, market cap, FDI, wealth creation, the billionaires list. We don’t have a job creators list. We need to start sending the message out that you make investments but in a way, that create jobs. All over the world, the central bankers, Prime Ministers, Presidents of countries always talk about jobs. Everywhere the jobs are, in very articulated manner, being given an important place and in India we need to start doing it and there are various ways to do it.

Is there room for expenditure to grow because there is a benign receipts environment in the next fiscal as compared to current fiscal. What is the one black ace of spades?

Divestment is the biggest ace that the government has. The markets are good, assets are in demand including land, as you know in India getting a land is not very easy. Affordable housing is a big one. The government can allocate land for affordable housing which will then spin off other benefits. Asset sales, whether divestments or sales of land directly or indirectly through government companies, could be one big way which could help raise Rs 1 lakh crore.

Would it be counter intuitive to get long-term capital gains tax in the middle when divestment targets are so high?

I will call it non-tax revenue and not divestment which is a part of non-tax revenue. If you can increase your revenue by Rs 1 lakh crore, then you can make a huge difference because you can do all the spending. It will offset the oil price increase headwinds. Any change in LTCG or any capital gains is not warranted because equity investing is also about studying risk-taking behavior. We need this year for individuals and companies to take more risk. We need to encourage risk behavior so that people can invest and take risk and grow the economy. So, tinkering with that at this stage will be counterproductive.

Why can’t risk be more than one-year risk?

The stock market or investment community may not be happy with it but, when it comes to risk timelines, one to three years won’t make any difference. This year, you should not destabilise anything. If you can postpone it by a year, it won’t make a big difference from a revenue point of view. So, you are sending a signal, but it will not have any impact on the revenue; may be couple of thousand crores is the revenue impact. So, changing it for making a signal, you can do it after a year. It will not change the financial structure in any material way.

How is the whole NCLT process going in your view?

The banks have made a large part of the provisioning cycle over. The entire NPA cycle starts with provisioning, then you resolve and then you recover. So, NCLT is for the resolution process and then recovery. Owing to the AQR which RBI did a few years ago, I think we are 3-4 quarters away from provisioning, but it will get over soon. So, the mark to market has almost been done. The actual resolving, restructuring, selling assets and recovering has started. The NCLT process is going well. In India, whenever you have a new law, it will get tested. However well you make a law, it will be tested because there will be circumstances, individual characteristics of every deal which will come about. The NCLT process has stuck to the guidelines and timelines and it has worked very well. We have Murli cement and Benani cement which got sold. All the steel companies are getting bids. There is a lot of expression of interest from lot of companies. I would expect the bids will come in and get finalized between March and April. It will take another three to six months from foreclosure because you have to get approvals from the government and competition commission. Before the calendar year 2018 is over, about 20-25 percent of the NPA cases would have been resolved.

Is it time to signal banking reform too?

Banking reform needs a much broader conversation. There are lot of reports like PJ Nayak committee report and Indradhanush reforms too. There are not only governance and management reforms but also structural reforms including digital. We need much larger reform approach to banking. We have gone beyond banking. Now we need financial sector reforms and not banking reforms. Because insurance companies, mutual funds, capital market, bond market, banks are all interconnected. We are moving away from a bank-centric financial services structure to a financial sector where banks play a role but NBFCs, ARCs, housing finance companies will also play a role. So, we need a global blueprint on reforms for the financial sector which develops the bond market and project financing. We have had a PJ Nayak report which was a fabulous report but that’s only about governance in banking, which is a subset. But if we take this opportunity, we should set up financial sector reforms and see how it is interconnected and how much household money we need to divert to insurance, capital market and have a global game plan on it and then implement reforms accordingly.