Corporate Tax relief: Feeding industry oats in the hope that the poor will eat the dung

The ailing Indian Economy has been administered a strong dose of medicine—in the form of a substantial reduction in corporate taxes. It was, of course, to be expected sooner or later particularly after Donald Trump reduced the corporate tax rate to 20%.

The medicine is strong, potent and has worked in some places in the past. But the question is, is it the right medicine for the malady from which the economy is suffering today? A medicine for Typhoid usually does not cure, say, Pneumonia.

The malady has been identified to be lack of demand. But the medicine prescribed by the Government augments the cash earnings of suppliers. The logic is that this will enable the suppliers to increase the supply by making fresh investment and thereby generating fresh employment, or reduce the prices, both pushing up the demand.

To elaborate, this can work only when the additional funds made available is invested in productive enterprises generating employment and not in speculative activities, and the investment is made in the national economy and not abroad. Only time will tell if any of this will happen. To go by the track record of Indian business, it is not very likely.

The alternative approach is to increase public expenditure and undertake socially useful projects which will put money directly in people’s hands, preferably creating or enhancing the existing capital assets. This should increase the demand on the one hand and also push up production and productivity.

The much-acclaimed GRAMIN ROJGAR YOJANA is a classic example. While initially, this scheme did boost up rural demand, its long-term beneficial effects are yet to be felt. Media could take up 10 villages in each district where the expenditure on this scheme have been highest and report what capital assets have been created during the last 10 years and to what use have these assets been put.

The conflict between supply side prescriptions and demand side maladies have not been resolved in many decades. Both sides have Nobel-laureates amongst their supporters. As a layman one can only believe that both schools are correct under different circumstances.

What does the past suggest? Roosevelt’s New Deal and perhaps the revival of German Economy in the thirties of the last century validated Keynes. But would the American recovery have been as spectacular as it was without the Second World War intervening?

The revival of American Economy under Reagan is again touted as a great success of Supply-side economists. But doubts remain whether but for the technical break-through achieved during that period, this would haven possible? The impossibility of carrying out economic experiments under controlled laboratory conditions makes it inevitable that Economics is and shall remain an imperfect predictor of events. As I said only time will tell what will really work.

But the really perplexing question is why there is a lack of demand? The GDP has increased every year, and at a rate which implies an increase in per capita income. The population is also increasing. Then why is the demand sluggish?

Of all the explanations offered the most credible one is that growth has been lopsided, the bulk of the increase going to the rich and the increase in the income of the poorer fifty per cent of the population is insignificant. But even that is perhaps not the whole story.

For the last several decades, Economics has been a prisoner of Mathematics. Not sufficient attention has been paid to the psychology of the people. Yet the mood of the people is a major determinant of consumption. If people are generally happy, consumption will increase. How to change the mood of the people is the million Dollar question.

The world over, governments have been concentrating on supply side solutions, possibly with the exception of Scandinavian countries. The inevitable result has been a significant increase in economic inequality. This is explained away by saying that as the rich get richer, part of it trickles down to reach the poor.

An American economist, by no means a socialist, had commented about this trickle-down theory that it was like feeding oats to horses in the hope that sparrows would feed on the dung.

But people are not sparrows. They can turn into hawks.

It may be a good idea to watch Hitchcock’s “The BIRDS” now.