Winning Strokes
Domestic share markets extended previous session's rally triggered by the government's move to slash corporate tax rates for domestic companies.
The surprise decision by the government is seen boosting corporate earnings to some extent as the effective corporate tax rate after surcharge stills stands at 25.17%.
Moreover, the move to reduce the tax to 15% for local companies incorporated after October 2019 is also being given too much importance by the media in the present context.
However, the government giving MAT relief for those opting to continue paying surcharge and cess at 22% is a good move. MAT has been reduced to 15% from 18.5% for companies who continue to avail exemption and incentives.
Though the Indian media is going ga ga on this step saying that it will bring significant positive implications for corporates' profitability, broader economy and market valuations, I feel with Peak Income Tax remaining same and around 33% of the listed companies closing down, it will have a limited positive effect on the sagging fundamentals of our economy.
The NaMo Government -2 is trying hard to lift capital markets to pep up disinvestment sales. The NDA government has in the last 5 years has sold the shares worth Rs.3 lakh crores of PSU companies which were created by Nehru - Gandhi Governments as a part of socialization drive post Indian Independence. This is the highest ever sell of family jewels by any government, till date.
Meanwhile, in the past two days, the Sensex has been surging madly, as if the Narendra Modi's government has struck some gold somewhere. This belies the real problems associated with our economy, which has been tortured to the hilt during the last 5 years.
The insanity generated by the NaMo media is so high that during the last two trading sessions the Sensex soared by 8.30% from its close of 36,093.47 on Thursday, 19 September 2019. The Nifty on the other hand rose by 8.75% from 10,670.25 on Thursday, 19 September 2019. The Nifty Bank index rallied 14.17% from its close of 26,757.65 on Thursday, 19 September 2019.
The cut in corporate tax is likely to give more pains to the Government in terms of indirect tax collections.
There are several media reports that the premature implementation of the GST has actually cramped the fiscal maneuverability. The GST collections are expected to fall with states' share dropping below the earlier estimated limits.
This will limit Government spending on core sectors such as health care, Infrastructure, Railways, etc.
Moreover, the hype that Banks will be an immediate beneficiary of corporate tax Bonanza is also exaggerated. The NPAs of Banks have crossed around Rs.14 lakh crores and 5-6% corporate tax cuts will hardly give the much needed impetus to the sector, unless the consumption and employment figures show a significant improvement.
Meanwhile, the Howdy Modi has been a flop show in the US in business terms, though it was able to generate a massive crowd.
In such a scenario when the saturnine mood has been made slightly better by sweetening with the current corporate and GST incentives, I would suggest you to book profits and wait on the sidelines for the market to stabilize; as it is still trading at P/E of around 27.
Note: I have decided to cut short my sojourns in Social Media and start focusing on this platform more.
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