We have not seen the stock markets zoom 2,000 points in a single trading day for the last 10-years. In one hour, about Rs 5 lakh crores was added to market cap. A significant part of the losses in the stock markets of the last few months, seemed to have recovered in a single trading day.
The biggest reason for the same was the cut in corporate tax rates, announced by Finance Minister Nirmala Sitharaman. The effective tax rates would now be 25.17 per cent, from the near 30 per cent.
This is a big boost to corporates and would increase profits in their hands. The belief is that since they would have that extra amount, private sector investment could get a boost.
If that happens, we could see unemployment too fall. These measures are going to cost the government a cool Rs 1.45 lakh crores. Perhaps, the boldness has come from the money that the government received from the RBI.
Pertinently, the corporate tax rate now becomes competitive when compared to even the developed countries.
"After a large number of minor measure, the government announced a bold and major measure to revive animal spirits. The high corporate tax rate meant that Indian companies were not competitive and this move helps address this and shall also boost FDI. The effective tax rate now stands at 25.17%, and for new companies the effective tax rate will be 17%. The measure is thus a boost for start ups as well. Additionally, the finance minister also announced that there will be no tax on buybacks announced before July and no surcharge on capital gains as well," said Mr. Rajiv Singh, CEO, Karvy Stock Broking.
What would happen to the fiscal deficit?
The fiscal deficit is slated to go higher, and there is little doubt about that. However, that does little to assuage market fears, as the government has broken the shackles and gone ahead and is spending.
However, sector wise there have been no benefits and the reduction in corporate tax, means companies benefit across the board.
What is also most important that from a sentiment point of view this is a big move. Consumers, investors and analysts have been waiting for some big bang reforms and no doubt this is a bold move. Bond yields have already surged on worries that the fiscal deficit would widen sharply.
Some concerns do remain?
While concerns on the fiscal deficit do remain, the other concern is whether the savings by corporates through a corporate tax cut would finally translate into investments by these companies. Remember, margins of corporates have been badly squeezed. Another problem is that specific sector related problems have not been addressed in this mammoth package of Rs 1.45 lakh crores. If demand continues to remain subdued, for example in auto, the gains by way of corporate tax may do little to benefit these companies.
The most important thing is that corporates must go out and spend.
Sensex zooms nearly 2,000 Points
The Sensex and the Nifty have zoomed to see the biggest gains in 10-years. The Nifty was last seen trading higher by 604 points , while the Sensex zoomed 2,000 points. Gains today were led by Eicher Motors and Ultratech Cement. If corporates are going to benefit 5 per cent, by way of corporate tax cuts, earnings are going to improve by 5 per cent and this is what led to the rally in the markets of 5 per cent. Markets are likely to continue to rally in the coming days, though investors may need to remain weary at higher levels. The RBI is now expected to back the government's present move with an interest rate cut next month.