Has India taken first step to become globally competitive? How can we benefit from it?

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The day she took over finance ministry, many including me were like… “Why not Piyush Goyal? Why Nirmala Sitharaman? Suddenly”…. It was shock treatment to market participants at that moment.

Series of events happened in past few months….

Gloomy environment, slowdown plaguing across sectors, Falling GDP growth at accelerated pace, Job cuts across different sectors specially manufacturing companies, RBI’s over focus on targeting inflation and sacrificing on growth, Budget woes of taxing super rich and FIIs… Incessant selling by FIIs..Billions of dollars withdrawal by FPIs/FIIs from Indian markets… Initial ignorance of FM to read signals from market correctly exacerbated the situation.

After late realization of mistake of ignoring markets, sudden change in stance by FM, Then meetings meetings and more meetings… 2/3 press conferences and small stimulus packages to economy. Nothing was working right. It was as if a patient is really serious and you are giving it electrol powder and hoping it to get recovered immediately..

Suddenly, on a boring Friday, announcement by FM at 11 AM, took everyone by surprise !!! Super courageous decision of slashing of corporate tax, from an effective 35% (with surcharges and cesses) to an effective 25.17%. What a move it was!!!
Finance minister slashed corporate tax rates for domestic manufacturers from 30% to 22%, while for new manufacturing companies, the rate was reduced from 25% to 15% provided they do not claim any exemptions.

The move was cheered by Markets,Corporate sector, thought leaders unequivocally.

Uday Kotak, CEO, Kotak Mahindra Bank, termed reducing corporate tax rate to 25 percent as a ‘big bang reform’. He said in a tweet:

“Reducing corporate tax rate to 25% is big bang reform. Allows Indian companies to compete with lower tax jurisdictions like the U.S. It signals that our government is committed to economic growth and supports legitimate tax abiding companies.A bold, progressive step forward”

What a bonanza it would create for India Inc year on year, every year. See the magnitude of decision:

“Our analysis indicates these companies could see tax savings of Rs 37,000 crore, or nearly a fourth of the total savings anticipated by the government,” mentions CRISIL report.

Finance minister has taken a gamble. Big one. It require guts in sacrificing a whopping Rs 1,45,000 crore (0.7% of GDP) of tax revenue to make India’s corporate tax rate competitive with that of Asian neighbors. Guts, real guts. Note here, the corporate tax is the largest tax revenue for the government. The total tax revenue from CIT for 2019-20 was expected to be Rs 7.66 lakh crores. Now with the rate cut, it may be around Rs 6 lakh crores.

Some important data to understand the share of corporate income tax in total pie of government revenue for readers to understand.

Tax Amount (Rs crores) Percentage share
1)Corporate Income Tax 766000 30
2)GST 663343 26
3)Personal Income Tax 569000 22.3
4)Union Excise Duties 300000 11.75
5)Customs Duties 155904 6.1
6)Gross Tax revenue 2552131 100

With this corporate tax cut, finance minister has given clear signal that they are listening to the industry demands.

Corporate tax cut is aimed at boosting investment by the private sector. The continuing deceleration of the economy was being blamed both on depressed consumption by private individuals and decline in investment by corporate sector. The two other factors contributing to growth a) government expenditure and b) exports , both have little space to boost growth. The cut in corporate tax chooses to single out private investment. This is a long-term measure that would make it more attractive for existing and new businesses to invest and increase production, which, in turn, will create employment. Investment decisions are normally more long-term decisions and a corporate tax cut would likely make it cheaper and more profitable for businesses to function in the Indian economy.

Major announcement for increase in future competitiveness of our country against Asian peers is that new manufacturing companies, which start operations after October 1, 2019, will only have to pay an even lower corporate tax rate of 15%.New manufacturing companies will have to pay an even lower corporate tax rate of 15%, which translates to a little over 17% after taking into account levies and surcharge.This is a major step in terms of attracting new investment. Foreign companies wanting to relocate to India with fresh investment will pay only 15% corporate tax now. At a time when the US-China trade war is making multinational companies re-think their investment strategies, this is a huge incentive for global companies to come to India. This also puts the Indian tax regime at the same level as many East Asian countries including Singapore.

Here is catch though.

India’s economy currently has a problem on the demand side – consumers are reluctant to buy everything from biscuits to cars. Reducing taxes, which boosts corporate earnings, doesn’t automatically solve this issue, unless companies pass on the benefit in the form of reduced prices. It’s not clear that will happen. It is clear supply-side measure. Reviving demand is a medium-term project that requires essentially putting more money in the hands of India’s consumers.Only corporate tax cuts won’t help, other reforms in land, labor, railway freight rates & electricity sector is equally crucial and everyone understands it. Even with the generous Rs 1.75 lakh crore transfer from the RBI earlier this year, it is estimated that the country’s fiscal deficit will likely surge by at least 70 basis points to 4% of GDP in 2019-20 as a direct consequence of this move.

Enough about complex jargons, math, number crunching and analysis.

Real question arises in every investor’s mind who are reading the article: “What is in it for me? How can I take advantage of the situation?”

1) First of all, for us life remains same. Save aggressively; invest prudently; stay put in good and bad times.

2) The impact of tax cuts is actually improvement in net profits of the corporates which were paying total higher tax percentage as total revenue. The bigger the shark, bigger the benefit.

3) When market reacted extremely positive for two consecutive days, it again underlined the fact that you have to be in the game in bad times to enjoy the expected or unexpected benefits in good times.

4) Market reactions are always knee jerk. Let the enthusiasm cool off. Identify suitable companies who are progressive, futuristic, adaptable in current VUCA world (Volatile,Uncertain,complex and Ambiguous). Remember most of the FAANG stocks which are ruling the worlds were non existent a decade ago.

5) Staying calm, focused and ignoring short term fluctuations help a lot in long run. Practice this. No investor is born with the traits. One need to take a lot of efforts to cultivate all these things.

6) In my 16 years of market experience, I have seen, After every lean patch may it be 2000-2003, 2008-2012, sudden spurts in indices happen. Nobody can time it. Nobody ever will be. Staying invested for long term helps a lot in equities. It really does.

It goes on and on…need to stop.

I would like to end the article mentioning a quote:

“In the field of observation, Chance favors only the prepared mind” : Louis Pasteur.

Happy Investing and stay blessed.

Amit

One thought on “Has India taken first step to become globally competitive? How can we benefit from it?

  1. By reducing Corporate income taxes, Govt has done it’s bit
    If Industry doesn’t reduce prices, then demand won’t revive
    Eg HDFC bank, HUL, RIL, P&G, United Spirits are going to be a massive beneficiaries but are they going to announce new investments or reduce prices/rates

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