The uncanny ability of the market to prove everyone, including savvy market players, wrong has once again been proved by the sharp and swift rebound in the market. A series of incremental stimulus announced by the finance minister for sectors like automobiles, real estate and banking didn’t do much to inspire confidence in the markets. But the bold move to cut corporate taxes took the market unawares and trapped the bears including FPIs. The consequent short covering led to a ferocious bull-run that took the Sensex up by around 3000 points in 2 days.
Challenging environment calls for bold reforms. This was precisely what the Finance Minister Nirmala Sitaraman delivered on 20th September. The cut in corporate tax rates and MAT and the new manufacturing tax are bold moves and from the market perspective, game-changing.
The major factor that pushed India’s GDP growth rate to a 6-year low was the decline in private investment, which has been declining steadily during the last 6 years. The corporate tax cuts announced, along with the monetary stimulus already provided by the RBI, have the potential to trigger the animal spirits and revive investment and economic growth. The 22 percent corporate tax rate (25.17 percent effective rate including cess and surcharge) makes our tax rates competitive and in tune with most emerging markets and our Asian peers. The new tax rate of 15 percent for new manufacturers can attract fresh investment and give a big boost to ‘Make in India’. The reduction in MAT is welcome. These tax cuts will leave more money with the corporates for investment and remove the negative image of India as the nation with the highest corporate tax rate. The psychological boost from these bold reforms will be significant.
The corporate tax cut, which is a permanent benefit to India Inc, is a move big enough to reset the market. The tax cut is likely to push up market earnings by 8-10 percent this year. The market rally is in tune with this expected surge in earnings. Since the tax cut is permanent, the market has been reset.
From the capital market perspective, the announcement that the enhanced surcharge will not apply to capital gains on sale of equity, derivatives or equity oriented funds and the removal of tax on buy backs for those companies who made the announcement before July 5 this year are clear positives.
The market has given a big thumps up to the reforms, which can be described as the most path breaking and reformative after Manmohan Singh’s path breaking budget of 1991 and P Chidambaram’s ‘dream budget’ of 1997.
The stimulus size is quite big since the revenue foregone is expected to be Rs 1.45 lakh crores. Of course, there will be a revenue shortfall and the consequent strain on the fisc. But the expected expansion of economic activity can partly compensate for the revenue shortfall.
These bold reforms, along with the monetary stimulus provided by the RBI, the relief package to the automobile and real estate sectors and the rural uplift expected from the good monsoon have the potential to kick start the economy and push it to higher growth.
Of course, the external environment needs to be keenly watched. The fact that 20 central banks have cut rates this year is an indication of the weakening global economic environment. Escalation of the geo-political tension in West Asia is another area of concern.
Posted on 24 September 2019