Government steps needed to boost economy, corporate taxes ,

effect of rising interest rates.

Gross domestic product (GDP) grew 5% in the first quarter of FY20, data released by the government showed,
marking the slowest growth since the fourth quarter of FY13. GDP growth was 8% in the year-earlier quarter and
5.8% in the preceding one.

China’s economy grew 6.2% in the June quarter.

the government has announced a package of measures such as liberalising FDI for select sectors, ensuring flow of
credit to non-banks, rollback of a controversial tax surcharge on foreign portfolio investors, more capital for banks and
a big-bang bank consolidation.

Immediate steps:
*Give auto sector incentives to invest and shift to electric vehicles

*Incentives to auto sector employees to upskill on electric vehicles

*Change GST collection to quarterly for companies below Rs 1 crore

*Reduce the GST slab rates

*Adopt the Direct Tax Code, cut income tax for the bottom slab

*Improve credit flow to both consumer and industry

*Reduce real interest rates by 135 basis points as cost of capital has to come down

*Change the credit culture in public sector banks

*Stimulus should drive investment, upskilling for displaced employees

*Factor market reforms, including bringing the cost of land down.

So the measures that Modi can take can be enumerated as under these three separate
headings:

1. Policy reforms with respect to Businesses:

 Free market policy, minimum number of permits etc required to set up a
business, in fact make the process of setting up businesses as short and simple as
possible, do away with all the red-tape, make land acquisition simpler and more
hassle free.
 All pricing, bidding and contract award issues to be brought in public domain, a
comprehensive administered price system the guidelines for which are also in
public domain to be easily monitored by any, protectionism of Indian traders when
they are in competition with foreign traders with cheaper capital unless
technology transfer is offered.
 Privatization of railways, privatization of most PSUs except those that are
dealing with areas where strategic interests are involved.
  Intervention and focus on setting up more manufacturing industries. In fact it
will be good if India can come up or forcibly occupy certain areas of
manufacturing depending on her resource availability. For instance countries like
Sweden are known for shipbuilding and heavy machinery manufacturing or
Germany is known for auto-mobiles and chemicals etc. This is something that the
planners need to work out and start work immediately. Of course India is much
bigger so can specialize in many field rather than just one, but the work should
begin from one area and then the benefits combined with governmental efforts
should spill into the others. Basically for India to be a global economic power the
country has to be a manufacturing hub rather than a services hub.
 Allow FDI in the manufacturing sector with the aim of becoming technologically
self-sufficient. Woo foreign companies with this sole aim in mind. This is a shorter
route to reaching the same level as the developed nations as opposed to
developing all the tech yourself.
 Strengthen business relations with weaker or underdeveloped countries to gain
markets for your industries. We need Bhutan, Nepal, Mayanmar etc as countries
where our products dominate and we can edge out the competition with the help
of friendly relations with the Governments.

2. Policy reforms with respect to Workers:

 Reform the taxation system. Have a one-point tax instead of so many different
taxes here and there. Preferably tax the expenditure of the people instead of their
savings i.e encourage more savings and discourage more expenditure.
 Bring in rulings to reduce the nuisance created by worker unions etc although
not at the cost of the exploitation of workers; have clear policies for working hours
and pay per hour as in the Western countries.
 Remove bureaucracy and government interference from all areas where private
setups can function without National interests being jeopardized. Make the
bureaucracy leaner, meaner and fitter; bring in corporate world like efficiency and
work culture.
 Bring in Citizens Charter and E-governance to the maximum possible extent.

3. Policy reforms with respect to expenditure of Public Money

 Stop all freebie schemes. Any scheme which involves public distribution in cash
or kind without work being taken in return should be stopped or at least phased
out: FSB, Mid day Meal, MNREGA etc. Schemes should be brought only with the
view to generate assets like Roads, Housing etc.
 Remove all manners of concession on Gas, Petrol, Diesel etc and to compensate
for that reduce taxes. All is not possible in one go so identify and mark out a
progressive plan to do this.
  Increase expenditure on Education for the young and the old as well; start social
awareness programmes instead of wasting money in schemes to get votes. Believe
me this will help the economy.

So the measures that Modi can take can be enumerated as under these three separate
headings:

1. Policy reforms with respect to Businesses:

 Free market policy, minimum number of permits etc required to set up a
business, in fact make the process of setting up businesses as short and simple as
possible, do away with all the red-tape, make land acquisition simpler and more
hassle free.
 All pricing, bidding and contract award issues to be brought in public domain, a
comprehensive administered price system the guidelines for which are also in
public domain to be easily monitored by any, protectionism of Indian traders when
they are in competition with foreign traders with cheaper capital unless
technology transfer is offered.
 Privatization of railways, privatization of most PSUs except those that are
dealing with areas where strategic interests are involved.
 Intervention and focus on setting up more manufacturing industries. In fact it
will be good if India can come up or forcibly occupy certain areas of
manufacturing depending on her resource availability. For instance countries like
Sweden are known for shipbuilding and heavy machinery manufacturing or
Germany is known for auto-mobiles and chemicals etc. This is something that the
planners need to work out and start work immediately. Of course India is much
bigger so can specialize in many field rather than just one, but the work should
begin from one area and then the benefits combined with governmental efforts
should spill into the others. Basically for India to be a global economic power the
country has to be a manufacturing hub rather than a services hub.
 Allow FDI in the manufacturing sector with the aim of becoming technologically
self-sufficient. Woo foreign companies with this sole aim in mind. This is a shorter
route to reaching the same level as the developed nations as opposed to
developing all the tech yourself.
 Strengthen business relations with weaker or underdeveloped countries to gain
markets for your industries. We need Bhutan, Nepal, Mayanmar etc as countries
where our products dominate and we can edge out the competition with the help
of friendly relations with the Governments.

2. Policy reforms with respect to Workers:

  Reform the taxation system. Have a one-point tax instead of so many different
taxes here and there. Preferably tax the expenditure of the people instead of their
savings i.e encourage more savings and discourage more expenditure.
 Bring in rulings to reduce the nuisance created by worker unions etc although
not at the cost of the exploitation of workers; have clear policies for working hours
and pay per hour as in the Western countries.
 Remove bureaucracy and government interference from all areas where private
setups can function without National interests being jeopardized. Make the
bureaucracy leaner, meaner and fitter; bring in corporate world like efficiency and
work culture.
 Bring in Citizens Charter and E-governance to the maximum possible extent.

3. Policy reforms with respect to expenditure of Public Money

 Stop all freebie schemes. Any scheme which involves public distribution in cash
or kind without work being taken in return should be stopped or at least phased
out: FSB, Mid day Meal, MNREGA etc. Schemes should be brought only with the
view to generate assets like Roads, Housing etc.
 Remove all manners of concession on Gas, Petrol, Diesel etc and to compensate
for that reduce taxes. All is not possible in one go so identify and mark out a
progressive plan to do this.
 Increase expenditure on Education for the young and the old as well; start social
awareness programmes instead of wasting money in schemes to get votes. Believe
me this will help the economy.

Why is the government cutting corporate taxes?

The corporate tax cut is part of a series of steps taken by the government to
tackle the slowdown in economic growth, which has dropped for five
consecutive quarters to 5% in the June quarter. The most immediate reason
behind the tax cut may be the displeasure that various corporate houses have
shown against the government’s policies. Many investors, for instance, were
spooked by the additional taxes on them that were announced by the
government during the budget in July and began pulling money out of the
country. The government hopes that the new, lower tax rates will attract more
investments into the country and help revive the domestic manufacturing
sector which has seen lackluster growth.

What impact will it have on the economy?

Tax cuts, by putting more money in the hands of the private sector, can offer
people more incentive to produce and contribute to the economy. Thus the
present tax cut can help the wider economy grow. The corporate tax rate, it is
worth noting, is also a major determinant of how investors allocate capital
across various economies. So there is constant pressure on governments
across the world to offer the lowest tax rates in order to attract investors. The
present cut in taxes can make India more competitive on the global stage by
making Indian corporate tax rates comparable to that of rates in East Asia.
The tax cut, however, is expected to cause a yearly revenue loss of ₹1.45 lakh
crore to the government which is struggling to meet its fiscal deficit target. At
the same time, if it manages to sufficiently revive the economy, the present
tax cut can help boost tax collections and compensate for the loss of revenue.

What lies ahead?

Some see the present tax cut simply as a concession to corporate houses
rather than as a structural reform that could boost the wider economy. They
believe that the current economic slowdown is due to the problem of
insufficient demand which cannot be addressed just through tax cuts and
instead advocate greater government spending to boost the economy. Others,
however, argue that lackluster demand faced by sectors like automobiles is
merely a symptom of supply-side shocks such as the goods and services tax
that have affected various businesses and caused job losses. If so, tax cuts and
other supply-side reforms can indeed help the economy recover from its
slump. However, the government will also need to simultaneously enact along
with these tax cuts other structural reforms that reduce entry barriers in the
economy and make the marketplace more competitive. The government
could, for instance, extend the tax cuts to smaller businesses. The benefits of
the present tax cut will also depend on whether the government sticks to its
promises in the long run. Investor confidence in the past, it is worth noting,
has been affected by retrospective changes to the law made by governments
in the past.
 Effect of raising interest rates
The Central Bank usually increase interest rates when inflation is predicted to rise
above their inflation target. Higher interest rates tend to moderate economic growth.
They increase the cost of borrowing, reduce disposable income and therefore limit the
growth in consumer spending. Higher interest rates tend to reduce the rate of economic
growth and inflationary pressures.

1. ncreases the cost of borrowing. With higher interest rates, interest payments on credit
cards and loans are more expensive. Therefore this discourages people from borrowing and
spending. People who already have loans will have less disposable income because they spend
more on interest payments. Therefore other areas of consumption will fall.
2. Increase in mortgage interest payments. Related to the first point is the fact that
interest payments on variable mortgages will increase. This will have a significant impact on
consumer spending. This is because a 0. 5% increase in interest rates can increase the cost of
a £100,000 mortgage by £60 per month. This is a significant impact on personal discretionary
income.
3. Increased incentive to save rather than spend. Higher interest rates make it more
attractive to save in a deposit account because of the interest gained.
4. Higher interest rates increase the value of a currency (due to hot money flows.
Investors are more likely to save in British banks if UK rates are higher than other countries) A
stronger Pound makes UK exports less competitive – reducing exports and increasing imports.
This has the effect of reducing aggregate demand in the economy.
5. Rising interest rates affect both consumers and firms. Therefore the economy is
likely to experience falls in consumption and investment.
6. Government debt interest payments increase. The UK currently pays over £30bn a
year on its national debt. Higher interest rates increase the cost of government interest
payments. This could lead to higher taxes in the future.
7. Reduced confidence. Interest rates affect consumer and business confidence. A rise in
interest rates discourages investment; it makes firms and consumers less willing to take out
risky investments and purchases.
 Therefore, higher interest rates will tend to reduce consumer spending and investment.
This will lead to a fall in Aggregate Demand (AD).

If we get lower AD, then it will tend to cause:

 Lower economic growth (even negative growth – recession)

 Higher unemployment. If output falls, firms will produce fewer goods and therefore will
demand fewer workers.
 Improvement in the current account. Higher rates will reduce spending on imports, and
the lower inflation will help improve the competitiveness of exports.

Both Economic Growth vs Economic Development are popular choices in the

market; let us discuss some of the major Difference Between Economic Growth

and Economic Development:

 Economic Growth is the increase in the real output of the country in a

particular span of time. Whereas, Economic Development is the increase

in the level of production in an economy along enrichment of living

standards and the advancement of technology.

 Economic growth does not consider the Income from the Informal

Economy. The Informal economy is unrecorded economic activity.

Whereas, Economic Development takes consideration of all activities,

whether formal or informal and eases people with low standards of

living a suitable shelter and with proper employment.

 Economic Growth does not reflect the depletion of natural resources.

Depletion of resources such as pollution, congestion & disease.

Governments are under pressure due to the environmental issues,

majorly the problem is due to Global warming. However, Economic

Development is concerned with Sustainability, which means meeting the

needs of the present without compromising.

 Economic growth is the subset of economic development.

 Economic growth indicates the expansion of the Gross Domestic

Product (GDP) of the country and the concept of Economic Growth is

 basically related to the developed countries. Economic Development is a

broader concept than the Economic Growth. Economic Development

refers to the increase of the Real National Income of the economic and

socio-economic structure of any country over a long period of time.

Economic Development is related to underdeveloped or developing

countries of the world.

 Unlike economic development, Economic growth is an automatic

process. Meanwhile, economic development is the outcome of planned

and result-oriented activities.

 Economic Growth refers to the rise in the value of all the products

produced in the economy. It indicates the yearly increase in the

country’s GDP or GNP, in percentage terms. It alludes to a considerable

rise in the per-capita national product, over a period, i.e. the growth rate

of increase in total output should be greater than the population growth

rate.

 Economic growth is necessary but not enough to achieve economic

development.
 They both Economic Growth vs Economic Development have different

indicators for their measurement. Economic Growth can be measured

through an increase in the GDP, per capita income, etc. However,

Economic Development can be measured through Improvement in the

life expectancy rate, infant mortality rate, literacy rate, and poverty rates.