New Delhi: India’s recent decision to slash corporate income tax has a positive impact on investment, said The International Monetary Fund (IMF). Speaking to reporters, Changyong Rhee, Director, Asia and Pacific Department, IMF said that India still has limited fiscal space so they have to be careful but we support their corporate income tax cut because it has a positive impact on investment.
Earlier last month, the Narendra Modi-led government had slashed the corporate tax rates to 22 per cent for domestic companies and 15 per cent for new domestic manufacturing companies and other fiscal reliefs in order to promote growth and investment. The total revenue foregone for the reduction in corporate tax rate and other relief was estimated at Rs 1,45,000 crore. This was said to be the biggest announcement by the Modi 2.0 government to fight the slowdown, which dragged down the GDP growth to a six-year low of 5 per cent in the April-June quarter of the current fiscal.
A top IMF official also hailed the government over its decision to slash corporate tax rates but noted that India should address the non-bank financial sector issues. “While there have been improvements that have been put in motion, including efforts to recapitalise the state banks, the issue of non-bank financial institution remains partly unresolved and regulatory equity is one of the issues that needs to be achieved,” she said. The government is aware of it, Anne-Marie Gulde-Wolf, Deputy Director, Asia and Pacific Department, IMF, stated.She added,”We also had a FSAP. So there are issues working at that and this is something that is why not yet fully achieved, but is entrained. While there are problems at this stage, increased attention to lending practices of non-bank financial institutions continue to be very important.”
Responding to a question, she said India overall has a fairly high level of debt and fiscal consolidation needs to be a priority. “However, implementing fiscal consolidation in the context of a federal system is much more complicated. The level of fiscal structural issues and challenges are different in different states,” she said. So one of the ways in which the IMF is engaged in this question is it has a regional training institute that has started working with the individual states on strengthening fiscal management at the state level, Gulde-Wolf said.
Earlier on Tuesday, IMF Managing Director Kristalina Georgieva had said that India worked on the fundamentals of its economy, but there are problems which need to be addressed. “In the financial sector, especially non-banking institutions, there are steps taken now to consolidate banks. They ought to help resolve some of these issues,”Georgieva told reporters.
A few days ago, the IMF had also trimmed India’s growth forecast by 90 basic points to 6.1 per cent, second downward revision in seven months and in total 120 basis points reduction. 100 basis points is equal to one percentage point.