Tax rate cuts: Centre's great growth gamble

The recent GST rate cuts and easing of personal income tax slabs suggest that the government is changing gears on growth. In tandem, RBI should step in with a bold rate cut

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Reduced tax rates usually bring big smiles all around, as have the reduction of the Goods and Services Tax (GST) rates announced on September 3. But behind the smiles of the people, stands the great growth gamble of the Indian government.

Lowering corporate tax rates, stepping up government spending on infrastructure and other incentive schemes have not triggered private investment in India in the past few years. Changing track, the government has unleashed a big demand push by lowering both direct and indirect taxes. In doing so, it has taken a substantial hit on the revenue side, endangering the fiscal health of the budget. This means that, if its calculations on triggering growth go wrong, India might have to borrow to make up for the tax-cut related revenues lost, derailing the fiscal consolidation journey. In a global environment that is so fraught with risk, aggression, and unhinged actions, India's best bet is to do what is needed to trigger domestic growth.

The government has taken a bold gamble on growth; the Reserve Bank of India now needs to step in with a giant rate cut. And analysts should let go of the deficit number fixation.

A quick update on the GST system of India. Sixteen state and Union indirect taxes were subsumed into the GST in 2017, marking a huge step forward on the reform journey. The GST rates are decided by the GST Council that is chaired by the Union finance minister and has representation from each state government. The rates and GST structure are a joint decision taken by the Union government and the states.