The recent corporate tax cut to 22% from 30% this reduction may have positive effect on investment but is not based on big picture. This is remedy for stagnant corporate investment. A large part of corporate sales is driven by rural demand, reflected in reported lay-offs by biscuit manufacturers. Rural pictures matters only because largest numbers are located there and also because of their low incomes. This means future growth of demand for much of industrial production is likely to come from there.
After all how many more cars can urban middle class buy once it already has one? Why rural Incomes are growing so slowly? Because, In the last 9 years since 2008-09, the crop agriculture activity has recorded zero or negative growth. When growth fluctuations include production decline a particular feature emerges which is: Household incurring consumption debt in bad crop year would be repaying the debts in good ones. This implies that consumption does not grow appreciably even in good crop years. But, this does not imply that other factors do not matter like ranging from low export growth to state of banking sector but this does suggest that poor agricultural performance is significant explanation of slack domestic demand. Production decline Unstable agricultural production first lowers the demand for agricultural labour and subsequently it’s supply, showing greater unemployment. It is pointed out investment rate has declined. Private Investment both follows output growth and leads it. When non-agricultural firms observe slow agricultural growth they shrink their investment plans and do not revise until growth improves. So, it is the rural income generation that is the problem.
Long Term Solutions must start with agricultural production, There is crop yield cycle related to annual variations in rainfall but we are now witnessing stagnation. We need expertise of agricultural scientists to confirm what is responsible for this state we cannot rule of ecological factors causing stagnation. Factors encompassing land degradation involving loss of soil moisture and nutrients and drop in water table, leads to scarcity which raises cost of cultivation. All this is directly man made related to over exploitation or abuse. Increasingly erratic rainfall due to climate change induced by human action. Intelligent governance, resource deployment and change in farmers behaviour will need to combine this. Policy focus is disproportionately on tax rate, Ease of doing business and fiscal balance target. Government needs to draw public agricultural institutes and farmer bodies for their views on how to resuscitate the sector. Ecological undertow could defeat our best laid plans for progress.
Reluctant Economist 