Markets soar over 5%, highest in a decade Reduction in corporate tax may revive auto industry
A BIG CHEER The Sensex jumped 5.3%, its biggest gain since May 2009, led by banks, automakers
MUMBAI: Indian stocks surged with the rupee while bonds slumped after the government unexpectedly slashed the corporate tax rate to boost economic growth.
The Sensex jumped 5.3%, its biggest gain since May 2009, led by banks and automakers. The rupee climbed 0.3% against the dollar. The yield on 10-year bonds surged 16 basis points (bps), the most for the benchmark notes since February 2017.
One basis point is one hundredth of a percentage point.
Investor wealth zoomed to ₹6.82 lakh crore in single day as equity markets rallied, with the Sensex skyrocketing 2,284 points in intraday trade.
Tax on domestic companies will be slashed to 22% from 30%, f i nance minister Nirmala Sitharaman said on Friday. The effective new rate will be 25.2% including all additional levies and is applicable only for compan i e s . T h e mo v e follows announcements over the past month t o boost c onsumer demand, bolster imports and attract investments into the country.
“The measures aren’t a patchwork but are real agents that will help revive growth,” Rajiv Singh, Hyderabad-based chief executive officer (CEO) at Karvy Stock Broking Ltd. “The fiscal deficit is a concern but at this time, growth should take priority.”
The news comes after stocks came under heavy selling pressure from foreign investors. Overseas funds sold a net $4.9 billion of Indian equities this quarter through Wednesday, poised for the biggest quarterly outflow since at least 1999. The Sensex index entered a correction on Thursday after falling 10% from a high reached on June 3.
India’s economic growth has decelerated for five straight quarters to the weakest level since early 2013, one year before Narendra Modi became prime minister. And the 5% headline number for the second quarter may actually understate how painful t he s l owdown has become. Car sales are sinking at the fastest pace on record, capital investment has plunged, the unemployment rate has surged to a 45-year-high and the nation’s banking system is hamstrung by the world’s worst bad-loan ratio. Monday’s oil-price spike added yet another headwind for a country that imports most of its crude.
Industry groups had been demanding that the government should use the fiscal space afforded to it last month by a more than $24 billion windfall from the Reserve Bank of India to revive the economy. The government’s measures to reverse the slowdown have so far come in tranches and were seen as inadequate.
All but two of the 19 sector subindexes compiled by BSE Ltd. gained, led by a gauge of auto stocks. HDFC Bank Ltd provided the biggest boost to the Sensex.
The S&P BSE Auto Index advanced 10%, its biggest jump in a decade, led by Ashok Leyland Ltd. A measure of banking stocks climbed 8%, the most in six years, boosted by private sector lender HDFC Bank Ltd.
I ndi a n c o mpanies t ha t announced share buybacks this year could save about $1 billion in taxes as deals announced before the government introduced a 20% levy on such transactions on July 5 will be exempt, f i nance minister Nirmala Sitharaman said on Friday.
“High tax-paying companies like Maruti Suzuki, HDFC Bank are just zooming. I have not seen this kind of rally in recent years, besides an election day. It will arrest the downtrend in sentiment, and auto companies are among the highest tax payers, so this will help some of the sectors t h a t h a v e b e e n wor s t h i t recently,” said AK Prabhakar, head of research at IDBI Capital Market Services.
“Investor sentiment will turn positive as the tax cut will help corporate profitability, increase business confidence and thus throws open a prospect of better valuations of firms,” said Vaibhav Sanghavi, co-chief executive officer at Avendus Capital PBC Markets Alternate Strategies Llp in Mumbai.
Mustafa Nadeem, CEO, Epic Research said: “Today’s reaction is totally out of surprise and it will be acting as strong support f o r t he c o ming weeks a nd months. 10,700 - 10,800 is now set to be a strong base for Nifty and we may see continuity in positive momentum on any dips from here on.” NEWDELHI: The prices of two- and four-wheelers manufactured by profitable automakers are likely to come down significantly following the cut in corporate tax announced on Friday—just in time for the upcomi n g Na v r a t r i a n d D i wa l i festivals.
The automobile component manufacturing sector which has been the worst hit by the yearlong downturn in the sales, will also benefit from the move.
In order to boost consumpt i on demand and i ncrease spending from private companies, the Union government on Friday cut the corporate tax rate to 22% from 30%. The effective tax to be paid by the companies will be 25.17%.
The move will also help companies t o s p e n d mo r e i n research and development (R&D) of products and other aspects of the business.
The tax cut is certain to boost the sentiment among automobile companies facing their worst slump in more than a decade. Of the top five gainers on the benchmark NSE Nifty50, three were automobile companies.
Eicher Motors was the Nifty gainer with gains of 13.76% while Hero Motocorp ended the day 12.3% higher.
Automobile c o mpanies exploring opportunities to manufacture in India will have to pay an even lower income tax rate of 15%, provided they start their production by 31 March, 2023.
According to experts, this move will also help companies who plan to invest in India to develop and manufacture electric vehicles. The effective tax rates on these companies will be 17.5%.
ALL BUT TWO OF THE 19 SECTOR SUB-INDEXES COMPILED BY BSE LTD. GAINED, LED BY A GAUGE OF AUTO STOCKS. HDFC BANK GAVE THE BIGGEST BOOST TO THE SENSEX THE MOVE WILL ALSO HELP AUTOMAKERS SPEND MORE IN R&D AND OTHER ASPECTS OF THE BUSINESS
To boost R&D in India, the Minimum Alternate Tax has been also reduced from 18.5% to 15% for companies who want to continue availing incentives.
According to RC Bhargava, chairman Maruti Suzuki India Ltd, high corporate tax has always been a major issue for companies looking to invest in India.
“The Union government has sent two very important messages through today’s announcements,” said Bhargava.
“The f i r s t message i s t o resolve the immediate issues of getting out of the downturn and the second one is this tax cut has essentially put a lot of money with the companies. That extra money enables them to take various kinds of actions to pump demand for their products in the market.”
Rajan Wadhera, president, Society of Automobile Manufacturers (SIAM), also welcomed the bold announcements made by the finance minister Nirmala Sitharaman.
“These are indeed landmark announcements and would certainly help in reviving growth in the Indian economy. These set of major tax reforms are a clear indicator of the government of India’s commitment to improving the business environment to give a definite boost to economic growth,” he said.
He added that the move to widen the scope of corporate social responsibility expenditure to include incubation centres and R&D activities will also help with R&D expenditures in automobile sector.
“This is expected to give a big boost to Make in India for automobile industry,” he added.