Finance minister Nirmala Sitharaman delivered a big gift to India Inc just ahead of the festival season. She slashed corporate taxes, scrapped some surcharges on capital gains tax and withdrew a levy imposed in July on share buybacks.
The government hopes these measures will boost corporate earnings and investments, and revive a sagging economy. Analysts and industrialists broadly agree.
Ridham Desai, India equity strategist at Morgan Stanley, anticipates growth in earnings per share to jump to 25% for 2019-20 from 13% last year. “One the biggest problems ailing the investment rate was low corporate savings. To that extent, this tax cut boosts corporate savings,” he says.
The initial reaction was indeed euphoric, with benchmark stock market indices jumping as much as 6% to record their highest single-day gain in a decade.
In the broader market, shares of nearly 1,900 companies advanced while 728 stocks ended in the red. Barring technology stocks, all indices gained with automobile and bank shares leading the pack.
But there is a flip side, too. The reduction in tax rates will result in the government losing roughly $20.5 billion in revenue. This means the government’s fiscal deficit may widen to 4% of GDP from the targeted 3.3%. As a result, the government will have to borrow more, pushing up bond yields.
To find out more pros and cons of the government’s latest stimulus, check out the podcast.