The sharp cut in corporate tax rate announced by the government last September did not help in restarting the investment cycle as was intended, but has been used by companies to reduce debt and build up cash balances, the Reserve Bank of India said in its Annual Report 2019-20.
As investment activity has further weakened in the economy, the RBI has suggested “targeted public investment” funded by asset monetisation and privatisation of major ports as a viable way to revive the economy.
Pointing to the weakness in indicators of investment demand and capital expenditure in the economy, it said there was a need for a government-led investment revival. “The corporate tax cut of September 2019 has been utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the capex cycle,” the RBI said.
Finance Minister Nirmala Sitharaman announced cuts in tax rates for domestic companies to 22 per cent and for new domestic manufacturing companies to 15 per cent, which, along with other measures, were estimated to cost the exchequer Rs 1.45 lakh crore annually.
Despite the competitive tax rates, the rate of gross fixed capital formation, an indicator of investment activity in the economy, has shown weakness. “Although data on Gross Capital Formation are not yet available for 2019-20, underlying indicators point to investment having weakened further. The ratio of real gross fixed capital formation (GFCF) to GDP declined to 29.8 per cent in 2019-20 from 31.9 per cent in 2018-19 on account of waning business confidence,” the central bank said.
Even data on production of capital goods — an indicator of investment demand — shows a contraction of 36.9 per cent in June 2020 (-64.4 per cent in April-June 2020) and import of capital goods contracted by 24.7 per cent in July 2020 (-46.7 per cent in April-June 2020). The corporate tax regime reform has not yet gained traction in boosting capital expenditure, the RBI stressed.
The central bank said these developments point out that “appetite for investment is anaemic” and a specific effort is required to bring it back on track. “Targeted public investment funded by monetisation of assets in steel, coal, power, land, railways and privatisation of major ports by central and state governments under an independent regulator can be the way forward to revive and crowd in private investment,” it said.
Privatisation of “major ports” owned by the Central government will help in generating additional resources. The 12 major government-owned ports are currently set up as trusts, including Jawaharlal Nehru Port Trust, Kandla Port Trusts, Chennai Port Trust, Cochin Port Trust among others. In Union Budget 2020-21 presented in February, the finance minister said plans to “corporatise” at least one major port and subsequently list it on the stock exchanges.
In a series of meetings taken by Prime Minister Narendra Modi last month, key economic policy adviser have suggested the need for an investment-led stimulus by the government spending aggressively on creation of infrastructure assets across the country. This would help revive the economy expected to contract at a record pace of around 20 per cent in the April-June quarter due to the impact of Covid-19 pandemic on economic activity.
The government has already started the process of privatisation of four big PSUs — downstream oil major BPCL, cargo mover Container Corporation of India Ltd and Shipping Corporation of India Ltd — through strategic sale and transfer of management control. IDBI Bank is another entity in which the government plans to sell its stake.
While asset monetisation and privatisation will help raise resources, the RBI further recommended that Goods and Services Tax (GST) Council type of apex authorities can be set up in respect of land, labour and power to drive structural reforms and speedier implementation of infra projects.
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