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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Trump’s Economy On Steroids

Modi, now a practised world leader, will need all his chutzpah to finesse the world’s most unpredictable leader.

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United States President Donald Trump has foxed most economists, including Nobel laureates like Paul Krugman. When he assumed office in January 2017, the US economy was trundling along at an annual growth rate of  two per cent.

This is what Krugman wrote about the impact of  Trump’s economic policies one day after Trump beat Hillary Clinton to win the US presidential election on November 8, 2016: “Markets are plunging. When might we expect them to recover? Frankly, the answer is never.”

On November 9, 2016, the day Krugman’s column appeared in The New York Times, the Dow Jones index closed at 18,613. Today it is at an historic high of over 25,000.

A chastened Krugman conceded, somewhat gracelessly, in his column 19 months later on June 30, 2018: “Just to be clear, the U.S. economy is still doing quite well overall. Those of us who thought the economy would be hurt by political uncertainty have been wrong so far.”

Meanwhile, Trump pushed the biggest tax cuts in recent US history through the deeply polarised Senate. Corporation tax was slashed from 35 per cent to 21 per cent. The impact was immediate and powerful: GDP growth spurted to 4.1 per cent in the quarter ended June 30, 2018. For a $20 trillion economy, that’s equivalent to adding over $800 billion to GDP every year – about a third of India’s total GDP.

Unemployment in the US is down to 3.9 per cent, another historical low. Companies are passing part of  their tax savings to employees who are seeing fatter pay cheques every month. American companies, which for decades had set up base abroad in low-tax regimes, are returning to build manufacturing units in the US. The dollar is on a roll.  

There are lessons in all of this for India. Tax reform is critical. Indian personal and corporate taxes are still too high and too complex. The Goods and Services Tax (GST) has nearly doubled the number of indirect tax filers from 60 lakh a year ago to over 1.10 crore. The number of direct personal tax filers has risen significantly from 3.75 crore in 2014 to 6.50 crore in 2018.  

Yet, complexity abounds. New income-tax returns for salaried taxpayers have tedious new details that need to be filled in with professional help. That is click-bait for tax evasion and symptomatic of how the finance ministry’s hamhanded bureaucracy works. Finance Minister Arun Jaitley had in his 2015-16 Union Budget pledged to cut corporation tax from 30 per cent to 25 per cent for all companies. In the 2018-19 Union Budget he cut the rate to 25 per cent for companies with an annual turnover less than Rs 250 crore. This, he said, would cover 99 per cent of Indian companies. What he didn’t say is that the one per cent of Indian companies the tax cut would not cover account for over 90 per cent of corporation tax revenue. With this sleight of hand, Jaitley had protected government revenue while providing relief to the overwhelming majority of small and medium Indian companies.  

Why isn’t that a good thing? Because, unlike Trump’s across-the-board corporate tax cut from 35 per cent to 21 per cent, large Indian companies that account for over 90 per cent of corporate India’s annual revenue (and hence tax) have received no tax relief despite the promise made in the 2015-16 Union Budget. They will therefore not be able to pass on any benefits to their employees. Much deeper tax reform is needed. Widening the tax base is necessary but lower taxes, as it has been proved worldwide, improve compliance.  

All of Trump’s economic policies are of course not worthy of emulation. His protectionist stand on trade is deeply damaging. The trade wars with China and Turkey have roiled global stock and currency markets. It’s true that China is the world’s biggest culprit of intellectual property (IP) theft. The lesson it is learning from Trump’s hardball trade tactics is long overdue. But free trade is the pivot around which global trade revolves.

Trump argues that he too believes in free trade – as long as it’s fair trade. He wants reciprocity on tariffs. In principle this is an irrefutable argument. The problem lies in the interpretation of whether absolute reciprocity on tariffs between a country with a GDP of $20 trillion (the United States) and $2.7 trillion (India) is justifiable.  

Ever since he took office 19 months ago, Trump has been eviscerated by the Democratic party-leaning US media. CNN, MSNBC, The New York Times and The Washington Post have abandoned basic journalistic principles. Sources are trumped up and facts made up. Hysteria has replaced analysis. Trump has made things worse for himself by promoting his son-in-law Jared Kushner, an observant Jew, as White House advisor and point man for Middle East peace talks between Israel and the Palestinians. Such examples of nepotism have eroded Trump’s credibility – but not with his ultra-conservative white base. His favourability rating is hovering around 45 per cent, similar to former President Barack Obama’s rating at a similar stage in his presidency.  

To the US media’s dismay, Trump has already established a re-election team for the 2020 US presidential election. If the US economy continues to boom, there’s a realistic chance that the world may have to learn to live with Trump for another six-and-a-half years. The thought sends shivers down the spine of America’s mainstream media which has shown an intolerant, illiberal streak bordering on the unhinged.  

For India, as it awaits Trump’s acceptance of Prime Minister Narendra Modi’s invitation to be chief guest at the January 26, 2019 Republic Day parade, there are good and bad things to pick up from Trump’s presidency. Tax cuts are among the good things. Trade protectionism is a bad thing.

If  Trump does turn up at the Republic Day parade next year, Modi will have the opportunity to revive an India-US strategic partnership that has gone cold as Trump’s geopolitical priorities chop and change. Modi, now a practised world leader, will need all his chutzpah to finesse the world’s most unpredictable leader.

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