India Inc.’s capital expenditure cycle will take more time to revive as the companies may first use the incentives in the form of lower corporate tax rates to pare debt, leaving little room for investment, according to Tata Mutual Fund’s Rahul Singh.
“Since most of these (capital-intensive) companies are now in a leveraged position, these (corporate) tax cuts might go to service the debt and get the balance sheet in place,” Singh, chief investment officer (equities) at Tata Mutual Fund, told Bloomberg Quint in an interview. “Therefore, the organic capex cycle of Indian companies might take time to revive. I think what we are talking about is if you can generate inorganic sources of capital goods cycle, which is attracting investments from companies not present in India now.”
On Friday, the government announced its plan to cut corporate tax rate to 22 percent from 30 percent for all domestic companies as it aims to revive the economy after growth fell to the lowest in six years. The effective tax rate would be 25.2 percent, including surcharges and cess.
Finance Minister Nirmala Sitharaman said the corporate tax cut would promote growth and investment but would cost the government Rs 1.45 lakh crore in revenue.
Analysts and corporate houses, too, expect the move to boost profit growth, kick-start the private capex cycle and make the nation a favourable investment destination.
“The investment cycle really has a good chance of getting a shot in the arm. Because there are now companies which will try to set up shops in India, given what’s happening with the U.S.-China trade war,” Singh said, adding that there could be a real chance with this corporate tax cut to attract investments. “But there are land and labour reforms which are still to be accomplished.”
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