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THE BOOSTER INJECTION TO THE ECONOMY AND ITS FOUR MAJOR IMPACTS

23 Sep 2019

Finance Minister Nirmala Sitaraman’s announcements on Friday - September 20, to boost the economy turned out to be a Diwali coming early for the investors who suddenly came back into the markets. The Nifty 50 index shot up by over 600 points which also happens to be the highest rally of the markets in over ten years.

The markets had opened at 10,746 and had touched their lowest at 10,690. Bu as soon as the press conference by Nirmala Sitharaman began, the markets climbed steeply, rising to the level of 11381- the peak after which it settled at 11,274.

The measures which were announced by the FM were mainly helpful for the companies and the people forming companies in India. With the multi-dimensional reforms, India has now become one of the countries with lowest tax rates for corporates.

The corporate tax rate was cut from 30% to 22% without incentives and for the newly formed companies, it was cut from 25% to 15% straight without any additional incentive. This move has four major impacts on the market and is likely to have the following consequences moving forward.

1. Boost to ‘Make in India’:

The move to slash corporate tax rates will boost new companies coming up to start operations. All companies which will start operation before March 31, 2023 will avail this benefit and will also be exempted from paying the Minimum Alternate Tax. This will enhance India’s productivity and the manufacturing. This will directly translate to more jobs and overall a boom in the business for the companies.

2. Festive Cheer Back In The Market:

The markets have received a positive boost after a long time. The boost coming right before the start of festive season in India is likely to increase the performance of many sectors which had been failing. FMCG and auto sector being the top two. The auto sector jumped over 11 percent following the announcements by the finance minister and the outlook for the FMCG sector also seems positive as the sales are expected to revive following the measures.

3. Increased Inflows:

The boost in the economy will push in funds coming in from the institutional as well as retail investors both Indian and foreign. However, the FPIs and FIIs are yet to come back, but the domestic institutional and retail investor have already started bringing the money back. This will also mark a positive turn for the banking and financial services institutions who now have high hopes pinned from the positivity in the markets.

4. Fiscal Deficit To Take A Hit:

While the tax cuts are beneficial for the companies, the government having forsaken Rs. 1.45 lakh crores of tax will hit the fiscal deficit for the government. The government had targeted to limit fiscal deficit to 3.3% However, as it appears the move will have a negative impact on this as the deficit will go much beyond this estimated figure.

Key Takeaways:

As the market has now changed its course completely, it would be the right time to buy from dips. Analysts at CapitalVia Global Research Limited opine that the rally will continue till after the festive season in India is over. The bears making a comeback can be expected after two months till which the buoyancy will remain in the markets.

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