How is the Indian Stock Market Reacting to the Coronavirus Impact?

How is the Indian Stock Market Reacting to the Coronavirus Impact

Impact of Covid 19 on the global markets

In the past few weeks, the stock prices have fallen drastically and the market saw a downfall of nearly a third of the global market cap. The whole world has been badly affected by the spread of the virus forcing companies to shut down, heavy unemployment and huge downfall in the economy. Almost all major most economic activities have impacted by the disease. The markets have been heavily damaged by the Covid 19 and the effects are visible on the global economic growth. The global gross domestic product (GDP) growth projection for 2020 has halved by the Organization for Economic Co-operation and Development (OECD). 

Current Situation in Indian Markets

Although, the market has slightly started to rise slowly such sudden fall in stock valuations and other instabilities have triggered panic across the world and shaken the confidence of investors. The past Friday turned out to be in favour of the investors. In the end, Sensex stood at closed 20% below the peak achieved two months ago whilst other markets which have fallen more. 

When the equity and debt instruments were already hit badly, the crude oil war between Saudi Arabia and Russia has only worsened the economic conditions injecting volatility into other assets. Now, the economic tension has extended to currency and commodities market.

Suggested Measures for Ensuring Financial Safety of Investments

Investment professional prefers investment in high performing- financially strong stocks with relatively higher earnings & profitability, solid balance sheets, bigger cash flows, and more effective management should be preferred. At the same time, professional advisers also suggest equity investors alter their portfolio allocation towards large-cap and multi-cap stocks as the market correction might be a little prevalent in the short term.

It might be suggested this is a good time for long term investors to buy high valuation stocks at low levels. For making a profitable investment and subsequent appreciation in the investments value few conditions shall be seen such as high-profit margin stock, low debt and innate capability & financial soundness to sustain even if the share prices touch the rock bottom due to instabilities. 

The more-safe investment options might also be suggestible like Corporate Bond funds / Banking & PSU Debt Fund which provide more reliability and trustworthiness in future which seems highly dynamic due to the highly volatile markets.

The Indian GDP and Its Future Estimates

Economic Growth during FY20

In the FY20 GDP growth was mere 4.2 per cent dragged down by the 3.1 percent growth in the January-March quarter. The revised the growth issued by the government for the first three quarters of FY20 are 5.2% in Q1, 4.4% in Q2 and 4.1% in Q3. The growth numbers were the lowest in past decade. In the previous financial year 2019 economy had grown at 6.1 per cent. Together with the contraction of exports by 3%, Private Final Consumption Expenditure contracted to 5.3 percent and the Gross Fixed Capital Formation was also contracted by 2.8 per cent highlighting the weakness of the Indian economy.

Effect of lockdown on Industries

Many industries such as tourism, aviation, hospitality as well as MSME sector were directly burdened by the losses during lockdown and the effect of pandemic on their businesses leading to high losses and loss of jobs within such sectors. Many industries, such as construction and automation were already under huge losses, had to completely stop their production. Talking with numbers, the overall growth was considerably slow for almost all industries. The hospitality sector expanded this year by only 2.6 percent. For the year of FY20, the manufacturing sector recorded nil growth. The agriculture sector grew by 5.9 per cent in the fourth quarter.

Future Estimations

The economic growth at 5 percent for the present fiscal year (FY21) has been estimated as 5% along with a contraction of 45 per cent in the Q1.
The Indian Government has announced a INR 200 Lakh crore package which mainly aims at medium & long term growth and short term stimulus is only INR 20 Lakh crore. In addition to this, a INR 21 lakh crore package has been announced to offer credit guarantee to the falling MSME sector, the repo rate has been reduced to 4 per cent.

Shaktikanta Das, The Governor of RBI, has said that economy has been badly affected by the disruption in supply and compression in demand. The RBI has projected a negavtive growth rate for FY21 and expects that the growth impulses to improve in the second half of the fiscal year.

Why are the Corporate Giants Opting Out of the New Tax Cut-Off Scheme of Modi 2.0?

Why are the Corporate Giants Opting Out of the New Tax Cut-Off Scheme of Modi

Story till Now

To stir up the economy, the Union Finance Minister, Nirmala Sitharaman has announced heavy tax cut off wherein the effective tax rate of around 35% has been reduced to mere 25%. On top of that, the tax rate for new domestic firms and new manufacturing units that set up in India, starting in October and commence production before the end of March, 2023 will be taxed at an effective rate of just 17%.  

This announcement of the Central Government has been received with great enthusiasm by the market as the Sensex hiked up by 1900 on Friday and 1300 points on Monday. This decision, although would cause a revenue loss of around Rs. 1.5 lakh crore to the Union government, is being considered a much needed support by the government to support the falling economy.

Will the benefits of tax reduction be transferred to Consumer?

 This move has been praised by all the business related community and has attracted investors. The tax-reduction, normally, results in lower costs and thereby higher demand for goods or services and ultimately resulting in the treatment of ailing demand. However, for now, it is rational to assume that the Businesses will not be transferring the benefits to the customers. The benefits from such tax reductions might be used to recover the losses that the organizations have faced because of the stagnant demand. 

Recently, nearly every sector was affected by the poor demands and caused huge losses to the Indian market, resulting in loss of jobs and huge unemployment. So, we assume that the benefits would be definitely but not immediately transferred to the ultimate consumers, i.e. once the companies are have made good all the losses incurred by them in the past few months. 

How is the corporate industry reacting for the same?

As stated above, this has provided benefits to the organizations by reduced tax slab and even higher market evaluation for most of the Companies. Although, now the corporate have the option of opting lower tax regime but the condition of foregoing other exemptions has made an economic dilemma in the minds of corporate. Therefore, we are seeing two kinds of actions by the corporate.

Some corporate are opting in the new tax rates and availing the benefits that new policies provide. However, on the other, few corporate such as Godrej and Dabur are opting out of the new scheme. 

Why are some corporates opting out of the new scheme? 

These actions by the giants follow their decisions to claim exemptions provided in the various sections of Income Tax Act, 1961 which would lapse if these corporate giants opt for the new scheme. As far as we can say, the companies who have a lot of exemptions to claim might skip the new schemes as of now and once these exemption benefits have been satisfied, they would opt in the new schemes.

We would like to conclude that companies which are willing to reap the benefits from various exemption-related provisions of the Income Tax Act tax cut off are opting out of the new schemes, rest are highly satisfied by the ‘new gift’ of the Finance Minister.

Why the Indian Market Rose up By 1900 Points?

Why the Indian Market Rose up By 1900 Point

On Friday, the Indian government launched an all out attack on the drooping Indian economy to counter the economic slowdown. Surprisingly, it was welcomed by the investors at a great level where the Sensex rose by over 1900 points and Nifty closed at 11,254. 

The main attraction of the announcement made by the Finance Minister was the tremendous decrease in the tax slab of corporate tax rate. In order to boost up the businesses, there was a significant  cut in the corporate tax rates, the effective tax rate (inclusive of surcharges) for domestic corporate, have been reduced from 34.94% to 25.17%. 

 Also, the tax rate for new domestic firms and new manufacturing units that set up in India, starting in October and commence production before the end of March, 2023 will be taxed at an effective rate of just 17%. 

The above decision of the government is being called as the most visible factor leading to the drastic change in the market, where Sensex and Nifty observed their biggest one-day rise since 2009.

What does this offer to the economy?

The decision clearly offers an incentive to the Indian markets to invest more in the corporate. As, most of advisors are suggesting, the present tax cut has made the country more competitive on a global level as far as corporate taxes were ever concerned. 

It must be noted that whenever such cuts are made there is obviously a loss of revenue for the state. However, such a loss is generally recovered if such an incentive is actually able to stir up the market. There are many benefits, this might bring such as more investment, employment, etc.

 Would it be actually helpful?

Whether or not this change of corporate actually stimulates the current economic slowdown, would be seen in time, but we would like to state what the experts are advise. On one hand, people are saying that this reduction is just a concession rather an actual help. As the real problem is the reduction in demand. Others say that the structural reforms such as GST has caused a loss in the demand of goods and employment. So, it is possible that such a reduction might actually help the current situation.

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