Few political leaders in major democracies have shown the kind of skill that Prime Minister Narendra Modi has shown in demolishing conventional wisdom and narratives. US President Donald Trump and British ‘Leave’ campaigner Nigel Farage come to mind but they haven’t had the kind of success that Modi has had in establishing a stranglehold in local politics. Many thought 2014 was a fluke till 2019 happened, with a stronger mandate.

In economic governance and reforms too, conventional wisdom has been defied, though not with the same regularity or strike rate as in politics. Many pundits complain big-bang reforms have not happened, forgetting Insolvency and Bankruptcy Code, goods and services tax, bank mergers, GST, introduction of monetary policy committee and last week’s corporate tax cuts. Demonetisation was dubbed a failure, ignoring its impact on the growth in electronic payments, sliding investment demand in real estate and the huge jump in mutual fund inflows, which has sustained to this day. But unlike politics, naysayers have had some success here, with concerns around the complexity of GST as well as the extent of the ongoing slowdown proving right, despite the government’s efforts to play down the severity of both.

Friday’s big bang tax cuts have already sparked all-round celebrations and talk that this is a big step that was needed to spur growth and investment. The BJP and the government are gung-ho and would obviously like to paint this as the magic pill needed to restore economic health. Much of corporate India and the investing community seem to agree with that stance. It would be prudent to temper the euphoria with scepticism. People are unlikely to rush to car showrooms to buy their favourite vehicle just because Indian companies now have a lower tax rate. Problems besetting the Indian economy are a bit too complex for that.

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To understand how this will play out, it will be useful to consider the background to India’s current economic problems. India is facing a credit slowdown, worsened by the NBFC (non-banking financial companies, or shadow banks) crisis and fears of default and liquidity issues. The country has also been facing an investment slowdown with any chances of a quick revival complicated by credit slowdown and banks’ unwillingness to lend to infrastructure and heavy industry. A steady rise in home loan offtake has not been enough to lift the real estate sector out of its gloom— the NBFC crisis has probably made things worse for them. Lastly, a deepening consumption slowdown has caught everybody by surprise.

Tax cuts will boost profits and earnings. Share prices will go up, investors will pour in money, not wanting to miss out on the opportunity. But will it solve some of the complex problems mentioned above? Will it help revive investment demand as many are predicting? Take real estate, for instance. It is true that much of the problems are restricted to the two big cities of Mumbai and Delhi/NCR. Demand everywhere else seems okay and that is also borne out by home loan growth, which is a decent low- to mid-double digits. Real estate probably needs a massive overhaul with the entry of investors with big pockets and the necessary will to take over and complete pending projects. Companies also need to cut prices. The strategy of holding on amidst stagnant or nil sales growth and overwhelming evidence of consumer angst over sky-high prices defies all logic. The sector has been helped by some friendly banks and the entry of private equity funds and, of course, booming sales in commercial property. Unfortunately Friday’s tax cuts will only postpone the inevitable emergency surgery needed as companies will use the bottomline boost to delay consolidation and price cuts.

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NBFCs are probably in a better position as they could use the extra money to pare down debt and improve liquidity. And that’s important in a sector where risk aversion still dominates. But their role as large credit providers to MSME and real estate is set to change and that may not be a good thing especially when banks are also turning risk averse.

Experts and corporate executives seem to believe that the tax cuts will revive capex but the jury is still out on that. Was India’s soft capex growth all these years due to lack of cash or liquidity? It’s difficult to believe that, given the robust market until early 2018 and the cash still sitting on books of corporations. Companies are more likely to watch for consumption pickup through auto sales before planning heavy capex, although minor capex to the order of a few hundred or thousand crores have been happening and will continue.

A big talking point from Friday was the 15% tax on new companies setting up manufacturing units. This is real, big reform. In one stroke, it removes a major hurdle to competitiveness and makes India attractive to a host of foreign firms leaving China and looking for greener pastures.

Everybody remembers India’s cricket tour of Australia in 2003-04. Sourav Ganguly’s biggest contribution was in making millions of Indians, who had given up hope of ever winning Down Under, believe that the country could do the impossible in hostile Aussie conditions. Virat Kohli finally achieved it last year but the foundation of that success was laid by Ganguly.

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Nirmala Sitharaman may not trigger a V-shaped recovery with Friday’s measures but she has made the country take a big step towards asserting its global competitiveness. She has laid the foundation much like Ganguly on that hot Sydney summer day did in 2003.





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