Technical Analysis

A ‘new deal’ for the economy

VK Vijayakumar | Updated on September 22, 2019 Published on September 22, 2019

The corporate tax cuts are enough to revive investments and economic growth

At the peak of the Great Depression in 1932, the then newly elected US President, Franklin D Roosevelt, told his countrymen: “There is nothing to fear but fear itself.” He went on to implement a series of measures, which came to be known as ‘The New Deal’ that played an important role in pulling the economy back from the Great Depression.

The measures announced by Finance Minister Nirmala Sitharaman on the morning of September 20 can be compared to the New Deal. These bold reforms, along with the monetary stimulus provided by the RBI, the relief package to the automobile and real-estate sectors, and the rural uplift expected from the good monsoon have the potential to kick- start the economy and push it to high, sustained growth.

The major factor that pushed India’s GDP growth rate to a six-year low was the steady decline in private investment over the period. The corporate tax cuts announced are good enough to trigger the animal spirits and revive investment and economic growth.

The 22 per cent corporate tax rate (25.17 per cent effective rate including all cesses and surcharges) makes India’s tax rates competitive and in tune with most emerging markets and our Asian peers. The new tax rate of 15 per cent for new manufacturers can certainly attract fresh investment and give a big boost to Make in India. The reduction in MAT (Minimum Alternate Tax) also can boost investment. The psychological boost from these bold reforms will be significant.

The market approves

The market has given a big thumbs- up to the reforms, which can be described as the most path- breaking and reformative after P Chidambaram’s ‘Dream Budget’ of 1997. The benchmark indices — the Nifty and the Sensex — have delivered the best single-day gains of the last 10 years. The ‘wealth effect’ of the market gains can also contribute to stimulating demand.

From the capital market perspective, the announcement that the enhanced surcharge will not apply to capital gains on sale of equity or equity-oriented funds and the removal of tax on buybacks for those companies that made the announcement before July 5 this year, are clear positives. The new mood of optimism in the market will certainly reverse the selling by FPIs (foreign portfolio investors) and pave the way for capital inflows.

The stimulus size is quite big since the revenue foregone is expected to be ₹1.45-lakh crore. This, along with the ₹ 20,000- crore package for the real-estate sector, has the potential to pump-prime the economy. Of course, there will be a revenue shortfall and a consequent strain on the fisc. But the expansion of economic activity can partly compensate for the revenue shortfall. The fiscal slippage is a risk worth taking. Fortune favours the brave.

The writer is Chief Investment Strategist at Geojit Financial Services

Published on September 22, 2019
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