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Here are the Growth, Monetary Policy, and Bond Market Aspects of Unexpected Corporate Tax Cuts

Further, it has resisted an easy consumption stimulus which may have had very little multiplier effects and possibly may have eventually contributed

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Growth, Monetary, Policy
With this the government has shown a clear commitment to shore up growth even with its back against the wall, fiscally speaking. Pixabay

The unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. That said, private estimates in this regard are between 0.2 – 0.4 per cent shy of the governments estimate.

Here are the growth, monetary policy, and bond market aspects of the move:

Growth
With this the government has shown a clear commitment to shore up growth even with its back against the wall, fiscally speaking. Further, it has resisted an easy consumption stimulus which may have had very little multiplier effects and possibly may have eventually contributed to some macro-economic imbalances. Rather, the tax cuts will help improve corporate profits and hopefully improve our global competitiveness. Further, incentives for new units announced may also help with attracting some of the global supply chains reallocations that are underway given escalating trade tensions.

Growth, Monetary, Policy
The unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. Pixabay

This may, however, not necessarily be a substantial shot in the arm for near-term growth prospects. The tax cuts may be used in a variety of ways, including stepping up investments, reducing debt, cutting product prices, increasing salaries, buyback and dividends, among others.

All told, the immediate pass-through and growth impulses created may be not as strong and thus the tax buoyancy hoped for on the back of stronger growth may have to wait for a while. This is especially true as general competitiveness in an increasingly challenging world requires other aspects of factor input efficiencies to fall in place as well.

Monetary policy
Prima facie, if, unlike earlier expectation of limited further space, fiscal policy has indeed chosen to step up to the plate, then monetary policy need not be as aggressive, all else being equal. That said, the global and local context is weak enough to argue for yet some (though not substantial) incremental role for monetary easing. This is especially true because RBI Governor Das doesn’t appear to be as large a fiscal hawk, currently (indeed welcoming the bold step from the government, after observing one day prior that fiscal space seemed limited).

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We would hence look for monetary “teasing” incrementally, as opposed to “easing” that we were expecting before and would expect the repo rate to bottom out in the 5 to 5.25 per cent area. The one caveat to this view is of further global growth deterioration which would then open up room for further easing, whereas liquidity policy is expected to remain one of substantial surplus.

Bonds
As noted, before term spreads have been quite wide for this part of the cycle, largely reflecting the inadequate availability of risk capital versus the supply of bonds (the same inadequacy is being reflected as higher credit spreads in the loan and credit market).

Despite more than adequate liquidity now, risk capital has been cautious possibly due to lack of confidence on market risk, given the fiscal and bond supply overhang. Since a large term premium has already existed, we wouldn’t expect a significant further expansion just because the risk has now materialized.

Growth, Monetary, Policy
That said, private estimates in this regard are between 0.2 – 0.4 per cent shy of the governments estimate. Pixabay

Further we don’t expect the entire expansion to manifest in the Centre’s fiscal deficit. After sharing this with states and accounting for other levers built in, we are looking for a final fiscal deficit of 3.7 nper cent versus the 3.3 per cent budgeted. This will entail some additional bond supply eventually, but with the cushion that the Centre’s net bond supply was slated to fall substantially in the second half of the year versus the first.

Portfolio Strategy
With the prospects of monetary easing somewhat diminishing in incremental intensity, and accounting for the somewhat higher bond supply, we may expect some amount of curve steepening going forward. This may likely happen as market participants anchor themselves to 3 thoughts: One, liquidity will remain abundantly surplus. Two, repo rate is here or modestly lower. Three, prospects of a very large bond rally are somewhat diminished (although this view will evolve going forward depending also on how much net additional supply actually manifests for local absorption) . This will likely increase appeal for the front end of the curve versus the longer duration, hence creating steepening pressure.

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Reflecting the above thought, we have cut our recent duration elongation into the 10-14 year segment and are now refocussing on being overweight 5-7 year for government bonds in our active duration funds. For AAA corporate bonds, the relative value continues in up to 5 years. These segments could better align to what remains an environment of abundant surplus liquidity, a very attractive term spread, still general lack of credit growth, and continued global monetary easing. (IANS)

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Recent Tax Cuts to Increase Sales of Automobile Sector

Lower automobile costs resulting from the recent tax sops announced to prop-up growth and reverse the economic slowdown and accelerate sector's sales

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automobile, cars, tax, growth
Not just reduced prices but even an expected up-tick in investment, courtesy the savings afforded by the tax sops, will aid the commercial vehicle segment. Pixabay

Lower automobile costs resulting from the recent tax sops announced to prop-up growth and reverse the economic slowdown, along with the upcoming festive season offers, have the potential to accelerate the sector’s sales, industry insiders said.

Market observers contended that reducing effective corporate tax rate to 25.17 per cent (inclusive of all cess and surcharges) from 30 per cent for all domestic companies will allow more auto firms to reduce prices.

At present, Maruti Suzuki has announced an immediate Rs 5,000 cut in the prices of its bestselling cars.

Besides, other companies such as Bajaj Auto, Piaggio India and Isuzu Motors India too have announced festive season discounts.

“Lower prices can increase demand incrementally, but cannot be expected to boost demand significantly,” Sridhar V., Partner at Grant Thornton India LLP, told IANS.

“Increase in liquidity will also help in increasing borrowings and thereby impacting buyers’ interest positively,” he added.

According to Fitch Ratings Associate Director Snehdeep Bohra: “Lower tax can help auto OEMs cut prices.

“But the overall scope for price reduction (as percentage of existing price) may not be very big in itself to spur demand… Improvement in sentiment and passing on of lower interest rates will be key.”

Not just reduced prices but even an expected up-tick in investment, courtesy the savings afforded by the tax sops, will aid the commercial vehicle segment.

“The effective corporate tax reduction is indeed a big supply side reform and should help spur investment cycle, which has been perpetually crippled,” Madhavi Arora, economist with Edelweiss Securities, told IANS.

“However, the supply side tax reforms generally have relatively long term economic returns, albeit impacting the revenue side in the near term,” Arora said.

At present, the automobile industry is suffering from a slowdown caused by several factors such as high GST rates, farm distress, stagnant wages and liquidity constraints.

automobile, cars, tax, growth
The key sectors to benefit from GST rate cuts are hotels, gems & jewellery, defence and automobiles. Pixabay

The industry’s sales and production levels have dramatically plunged, leading to job losses. In August, all major Original Equipment Manufacturers (OEMs) comprising passenger, commercial, two and three-wheeler manufacturers have reported massive decline in domestic sales.

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As per the Society of Indian Automobile Manufacturers’ (SIAM) August sales figures, the overall sectoral offtake in the domestic market has plunged 23.55 per cent to 1,821,490 units, from 2,382,436 units sold during the corresponding month of the previous year.

Moreover, the industry has estimated that around 15,000 contractual manufacturing jobs have been lost and another million are at risk if the slowdown is not reversed. (IANS)