The cuts in corporate income taxes from 30 to 22 percent and 15 percent for new manufacturing companies announced on September 20, which were enthusiastically welcomed by Niti Aayog and establishment pundits, have proved a damp squib. The expectation was that reduced tax payouts to the IT department would prompt corporate leaders, who now have more money in their treasuries, to invest in expanding capacity and would also attract foreign investors. But thus far, this expectation has been belied. Neither domestic nor foreign investors are breaking into a stampede to invest in India.
That’s because despite the tax cuts, which establishment economists aver makes India tax competitive with BRICS (Brazil, India, China, South Africa) and other foreign investment magnet nations, the soft state Nehruvian ideology which the country ill-advisedly embraced after independence, has always tolerated a parallel system of informal taxation, i.e pervasive corruption in government, which drives up manufacturing and business costs and makes Indian industry internationally uncompetitive. In addition, businessmen/investors have to factor in India’s inadequate and time-agnostic judicial system that makes it impossible to recover business debts within reasonable time. Moreover domestic and foreign investors have to provide for India’s weak and corrupt law and order system in their investment decisions.
Niti Aayog and establishment economists need to understand that tax and interest rate cuts will be effective only after the several rogue elephants rampaging within the economy are tamed. Strong economies need firm foundations. Unfortunately in realpolitik, there are no silver bullet solutions.