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

For more EMAlphainsights on Emerging Markets, please visit To know how you can use EMAlpha’s unstructured data on Emerging Markets for better investment decisions, please send us an email at [email protected].

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

This insight article is provided for informational purposes only. The information included in this article should not be used as the sole basis for making a decision as to whether or not to invest in any particular security. In making an investment decision, you must rely on your own examination of the securities and the terms of the offering. You should not construe the contents of these materials as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security. The information included in this article is based upon information reasonably available to EMAlpha as of the date noted herein. Furthermore, the information included in this site has been obtained from sources that EMAlpha believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. Information contained in this insight article does not purport to be complete, nor does EMAlpha undertake any duty to update the information set forth herein. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, by EMAlpha, its members, partners or employees, and no liability is accepted by such persons for the accuracy or completeness of any such information. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of certain investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting the operations of the companies identified herein, any or all of which could cause actual results to differ materially from projected results.