Surgical Strike or Band Aid?

On Friday morning, Finance Minister Nirmala Sitharaman announced that companies which don’t avail of any tax incentives will have to pay a tax of 22%, instead of 30%. The effective tax after including surcharge will be 25.17%. Likewise, tax for manufacturing firms has been reduced to 15%.

The news was met with joy on D-Street as the Sensex surged by more than 2,000 points, its biggest jump in a decade. Many analysts and headlines started calling it “surgical strike” and other interesting compliments. After all, this tax cut is expected to boost consumption.

But amidst this euphoria, it is worth remembering that this is just a temporary relief for an ailment that requires sustained, intensive care.

For one, as the Finance Minister admitted, this move will lead to a shortfall of Rs. 1.4 Trillion. Since the government will have to borrow more money to make up for this shortfall, it is projected to increase the fiscal deficit from 3.3% to 3.9%. This will lead to a depreciation of the rupee, negative impact on India’s credit rating, and a consequent adverse effect on India’s ability to attract foreign investment.

To be fair, this is a positive move which will improve the sentiments, something obvious from the surge in Sensex. As with everything, this will come at a price.

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