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Will Huge Cut in Corporate Tax Rate Revive Investor Interest in India?

Remember the date: Friday, 20th September 2019. After this day and irrespective of how things go now onwards, it is virtually confirmed that the list of India’s Finance Ministers who made an impact on Indian industry and domestic economy will always be incomplete without the inclusion of Mrs. Nirmala Sitharaman’s name. The massive corporate tax rate cut is a historic step and a massive comforting factor for the industry that the Government is listening to the signals from the ground. There are several things in these announcements which were made on Friday morning, but the result is that the average tax rate for companies is down from upwards of 30% to 25%. There are hopes from almost all market experts that the news flow and investor sentiment will get more positive now.

Hardly a surprise that Indian markets had one of the best days in almost ten years. More than 5% gains with almost 2000 points jump in BSE SENSEX is a big move and today’s market move will have its place in the history books. The Auto Stocks were big gainers with both Maruti Suzuki and Hero MotoCorp registering more than 10% gains. The Banking stocks were also in flavour and except for Information Technology, there was virtually nothing which investors were not buying. Now, the bigger question is that will this arrest the flight of Foreign Investors? And in case they don’t see this as enough, it will be difficult to figure what else will be sufficient.

While it is always good to see a jump in corporate earnings, there are several more things to look at and which we believe are important:

  1. The earnings growth is a challenge for Indian companies but this step in the form of a tax rate cut for companies is an artificial one-time measure. It doesn’t do anything to address the core problem of slack in demand.
  2. The selling by foreign investors has played a big role in why the market has not done much in CY19 before today. For the Foreign Investors, the USD returns matter more than INR returns. Now with an additional INR 1.45 trillion revenue shortfall, it is very likely the fiscal math will go haywire. That is bad for INR and surely hurt foreign investors.
  3. The expectation that the investment cycle will pick up is unrealistic. Having more money is one thing but the corporate will not invest unless they are hopeful on demand. A proof is in the fact that the repeated rate cuts by Reserve Bank of India (India’s central bank or RBI) has failed to revive capex cycle.
  4. Despite people focusing on a more than 5% move today, we should not see this in isolation. In last four days before 20th September, market was down almost 4% and when we compare today with previous Friday close (the BSE SENSEX on 13th September), the up move is less than 2%. Hardly anything worth getting excited about. So, the base effect played a role very clearly.
  5. Government has exhausted one of the biggest weapons in its arsenal and now, they are left with much less ammunition to deal with what could come next. It was a one is 20 years event in terms of significance and was there an emergency at this hour, the jury is still out.

We think it makes sense to wait for a while before we can call it an event which decisively turned the tide. It is too early to celebrate and it makes sense to wait for some demand revival and lift up in sentiment for end consumers. Will CY19 be green or red for investors in India, at least it is fair to assume that this step alone can’t decide that result.

Research Team
EM Alpha LLC

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