Corporate tax cut: Investment en route as FM soups up engine

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Reduction in corporate tax rates will boost business sentiment and spur investments with some frontloading of capacity expansion, but a broad-based recovery may come with a lag as many sectors witness low capacity utilisation, experts said.

The rate cut will raise profits, allowing companies to invest more, either with their own funds or debt raised on the back of a stronger balance sheet. “It will change investor sentiment as a tax rate reduction has been a long pending demand,” said Devendra Kumar Pant, chief economist, India Ratings. From 29.49% average tax rate in 2017-18 to 25.17% now, India will become an attractive destination for foreign investment and boost private sector savings, he said.

Private manufacturing investment has remained muted due to tepid demand and low capacity utilisation, while stress and high debt had prevented private participation in infrastructure.

Expansion in capital expenditure in the last few years has been largely in the public sector, funded from the budget. As per Reserve Bank, capacity utilisation rose marginally to 76.1% in the fourth quarter of FY19, from 75.9% in the third. Seasonally adjusted capacity utilisation, however, fell to 74.5% in Q4 from 75.6% in Q3.

Manufacturing sector investments declined 10.3% in FY18, sharper than the 2.7% fall registered in FY17, as per recently released provisional data of the Annual Survey of IndustriesNSE 9.57 %.

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Gross fixed capital formation (GFCF), as measured by a survey of about 20,000 factories, was `3.31 lakh crore in FY18, compared with `3.69 lakh crore in FY17. A broad-based recovery in investment is likely once capacity utilisation picks up, but new investments may quicken. Baba Kalyani, chairman and MD, Bharat Forge said the measures will provide “a big boost to rev-up private investments and improve business and investor sentiment.” It will go a long way in enhancing India’s manufacturing cost competitiveness, he added.

“This should create a huge stimulus, and investment plans of new companies may get speeded up now from the new announcements October onwards. The plans may get frontloaded. Existing companies that want to expand will also benefit,” said N R Bhanumurthy, professor at the National Institute of Public Finance and Policy.

The government has set a target of raising the share of manufacturing in the GDP to 25% by FY22, from around 17% now, through its ambitious ‘Make in India’ programme. According to the national accounts, GFCF rose to Rs 49 lakh crore in FY18, from Rs 43.3 lakh crore in the year ago in terms of current prices. Sectors with less dependence on labour may see a positive impact sooner than those that are highly dependent on land and labour, like infrastructure, because of issues like environment clearances.

“Low business optimism, low returns on capital invested by the corporate in the non-financial sector and increase in inefficiency in capital employed, raises concerns over pace of revival in investment. Investment demand indicated by a Gross Fixed Capital Formation, which used to be around 35% in 2013 has fallen to 32% currently,” said Arun Singh, chief economist at Dun and Bradstreet.

[“source=economictimes”]