Tax cuts can do wonders for economic recovery: SBI

In its latest report, the State Bank of India (SBI) has suggested tax rate adjustment on petrol and diesel, coupled with GST rate cut for some sectors, to revive the animal spirit in the economy, writes Krishnanand Tripathi.

New Delhi: India’s largest lender, the State Bank of India, has suggested a tax rate cut to rekindle the animal spirit in the economy, saying that tax rate adjustment on petrol and diesel, coupled with GST rate cut for some sectors, could do wonders. In a report, the SBI said the monetary policy measures such as low interest rate regime followed by the Reserve Bank of India have reached its limits.

In the report, SBI’s top economist Soumya Kanti Ghosh said despite several measures announced by the Reserve Bank to increase the credit growth, it remains subdued as corporate willingness for new investment remains low due to uncertain future.

“We firmly believe that even as RBI has taken many measures to reinvigorate credit offtake, it continues to be low because corporates have deleveraged by repaying high-cost loans through funds raised through bond issuances,” Ghosh said in the report.

In its monetary policy committee meeting, the RBI decided to keep the benchmark lending rate unchanged at 4% while maintaining the accommodative stance as long as necessary to support fragile economic recovery.

The RBI cut the repo rate, the rate at which banks borrow short term loans from the RBI, by 115 basis points last year to support the economic recovery during the pandemic.

However, Soumya Kanti Ghosh, Group Chief Economic Advisor of State Bank of India, feels that this low interest rate monetary policy now has limited scope.

Limited effect of low interest rates

“Only fiscal policy can rekindle animal spirits at this juncture – monetary policy has almost nil headroom,” Ghosh observed in the report.

Ghosh recommended fiscal policy tools such as a tax rate cut, rather than a low interest regime to revive the economy, which is facing unprecedented challenge due to local lockdowns imposed by states to contain the ferocious second Covid wave that ravaged the country in April-May this year. The two months account for almost half of the total Covid deaths in the country so far, as the deadly SarS-CoV-2 virus has killed more than 3,40,000 people in the country since March last year.

Tax cut for economic recovery

“A reasonable cut in fuel prices or even GST tax waivers for stressed entities could work wonders,” Ghosh said, adding that it would be worthwhile to support fiscal policy through tax adjustments.

The top SBI economist also warned that in absence of tax adjustments, the economic recovery would continue to be ineffective at fuel prices more than Rs 100 per litre when the economy opens up after lockdown.

Several economists in the past have warned that high petrol and diesel prices feed into the entire inflationary cycle due to elevated cost of transportation which has a cascading effecting on the price of almost all goods and services.

GST Council to consider rate cut

Despite a growing demand for rate cut from several quarters, the Centre and States have so far refused to cut GST rates due to dwindling tax revenue.

Though, the retail prices of petrol and diesel are at an all time high but both the Centre and States have resisted any demand to lower the taxes and duties imposed by them on production and sale of petroleum products in the country.

In fact, the GST Council, the apex decision making body having representations from both the Centre and States, failed to arrive at decision to cut GST rates on the Covid related materials such as medicines, oxygen concentrators and other medical equipment.

In a meeting held last week, the Council formed a group of ministers (GoM) to decide the issue of tax cut on the Covid related material. But there are no indication that this relief, which is under consideration, will be extended to other sectors of economy, including a cut in excise duty by the Centre and VAT reduction by States.