Viktor Shvets, MD and Head of Asian Strategy at Macquarie Capital, is of the view that corporate tax cuts are least efficient tools in stimulating demand, employment and investments.
Talking about the reasons why tax cuts do not work, Shvets said, “Tax is only one variable out many variables that corporates take into making a decision whether they want to invest, build a factory, employ more people, whether they want to do share buybacks or discount prices to grab market share etc. Other variables are far more important things like regulatory clarity, things like public service corruption, inefficient government regulations, things like monetary policies, technology and how technology evolves. All of that is far more significant than taxes.
“If you do tax cuts and you do other things at the same time, I think it can create powerful stimuli longer term", he said, adding that if you want short-term stimulus, there are far better ways of doing it.
According to him, "Tax cuts would essentially prevent another downgrade cycle. The extra 5-8 percent extra earnings per share (EPS) growth is not aiding to what you have but simply avoiding another cycle of downgrades. It also hlep stabilizes multiples. Right now India is trading on highest multiple in Asia-Pacific and that multiple is already based on inflated EPS estimates, so if you make the inflated EPS less inflated then you have greater stability in the multiple."
“Corporate tax cuts are very good signalling devices, they are not fundamentally very good. One of the things it does is that it convinces people that the government will get away from politics, nationalism, security - all the other matters and get back to the economy. However, it remains to be seen whether that is going to be the right answer. Investors right now are assuming that that is going to be the right answer," said Shvets. “I would look at India as a defensive thing,” he said.