The Economist - USA (2019-09-28)

The EconomistSeptember 28th 2019 Finance & economics 67

I

ndian businessfolkhave been morose

of late. gdp growth is slowing. Corporate

earnings and sales have been dismal, with

the automotive industry walloped particu-

larly hard. Redundancies are rising, sug-

gesting that a broader downturn is around

the corner. Though the government of Na-

rendra Modi has offered a few goodies and

pick-me-ups, including abandoning a new

levy on foreign investment, India Inc has

been sunk in gloom.

On September 20th the malaise lifted,

with a surprise announcement by Nirmala

Sitharaman, the finance minister, of steep

reductions in corporate taxes. There were

reports the plan had been cobbled together

in a breathless 36 hours—and suspicions

that the government hoped to get ahead of

further bad economic news. If so, it will

have been gratified by the response. Stock

trading, which had been lethargic, perked

up. The benchmark Sensex index saw its

strongest two-day rise in a decade, of 8.3%.

The suddenness was characteristic of

Mr Modi’s government, which has a pen-

chant for dramatic moves. It says the tax

cuts will leave an additional $20bn, or 0.7%

of gdp, in companies’ coffers. Tanvee

Gupta Jain, an economist at ubs, puts the

figure a bit lower, at $15bn. She adds that

the tax cut should raise India’s gdpgrowth

rate by 0.2 percentage points, this year and

in the future, by helping to attract manu-

facturers keen to move out of China. So far

most have gone to Bangladesh, Indonesia,

Thailand or Vietnam instead, since they of-

fer lower taxes and fewer legal pitfalls.

Earnings for the big firms in the Nifty 50

index will be boosted by 8-10%, analysts

reckon. The biggest winners will be profit-

able businesses paying the highest rates,

such as supermarkets, brewers and con-

sumer-product companies. Firms that al-

ready have temporary tax breaks, such as it

consultancies, will eventually benefit

when their perks expire.

India’s tax system is so fiddly that it can

reduce even grizzled executives to tears.

Accountants were besieged by clients seek-

ing guidance. Hitesh Gajaria, a partner at

kpmg, a global accounting firm, said the

tax reduction was the largest he had seen in

his 34-year career—and so too was the

number of people wanting to hear the de-

tails. Nearly 1,500 dialled into two webi-

nars he held on September 23rd.

The current base rate for the largest

companies is 30%. But surcharges push

this above 35%, on top of which companies

are taxed on the dividends they pay. The re-

cipients of those dividends may have to pay

yet more tax. Another levy was recently im-

posed on share buy-backs. The new base

rate will be 22% (25.2% with surcharges).

The buy-back tax has been lifted for some

firms, but the dividend tax remains.

A new discounted rate of 15% (17.2%

with surcharges) is supposed to attract

manufacturers. That is better than the

overall rate in any other large country, and

nearly matches low-tax Singapore. The av-

erage for all firms in Asia, says Mr Gajaria,

is 21%, and for the world 24%. Manufactur-

ers who take the plunge in India will be un-

able to accept any other incentives, such as

accelerated depreciation, credits for re-

search and development, or perks that re-

sult from locating in a particular place.

Simplification is a virtue of the plan.

But in India nothing is entirely simple. De-

bate has already started about the precise

definition of manufacturing and thus who

is eligible for the new incentive for the sec-

tor. Existing manufacturers in India are

pressing to be included, asking why they

should be penalised for committing when

others held back.

Tax is only one reason why India has

failed to capture a windfall as supply

chains shift away from China. Restrictive

labour and land-acquisition laws hamper

hiring and construction. Changing these

would require state governments’ approv-

al. Sadly for Indian businesses, that rules

out another welcome surprise.^7

MUMBAI

The government stuns markets and delights businesses by slashing corporate tax

Indian taxes

Ray of light

Modified

Source:KPMG

*Excludingstatetaxes

†SetupafterOctober1st 2019

Corporate tax rate, 2019, %

0 5 10 15 20 25 30 35

World

average

India Old (2018/19)

India New (2019/20)

China

Indonesia

Bangladesh

Malaysia

United States*

Thailand

Vietnam

India Manufacturers†

Singapore

O

ceans of cloyingchai; coils of sticky

jalebi—Indians cannot get enough of

the sweet stuff. Already the world’s largest

consumer of sugar (though with relatively

low consumption per person, at 19kg per

year, against a global average of 23kg), last

year India pipped Brazil to become the

world’s biggest producer. On September

30th its sugar industry’s book-keeping year

ends. A reckoning is due.

A production bonanza, spurred by the

brief scare of a shortfall in 2016-17 and by

higher-yielding sugar-cane varieties, has

driven India’s output to record levels. This

year it is expected to hit 33m tonnes of crys-

talline sugar, compared with domestic de-

mand of about 26m tonnes. The cumula-

tive build-up of sugar means that the mills

crushing fresh-cut cane could end up sit-

ting on as much as 14.5m tonnes. That is

thought to be the most sugar any country

has stockpiled, ever.

India has long granted sugar-cane farm-

ers special perks. It forces mills to pay sky-

high prices for sugar cane and makes it

hard for them to import it. Uttar Pradesh,

the state with the greatest acreage of cane,

sets an extra-generous “state-advised

price”, which guarantees farmers a huge re-

turn on their basic costs and labour.

Thanks to such artificial pricing, process-

ing sugar anywhere in the country is more

DELHI

A sickly tale of price distortions

Subsidies in India

Sugar lump

1