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FM's boosters seen as positive but insufficient to perk up manufacturing

Euphoria in markets knew no bounds on Friday as Finance Minister Nirmala Sitharaman announced a slew of fiscal measures, including cuts in corporation tax rates, to infuse animal spirits in the country’s sagging economy.

The S&P BSE Sensex skyrocketed a whopping 1,921 points or 5.32 per cent to settle at 38,015. On the National Stock Exchange (NSE), the benchmark Nifty50 leapfrogged over 569 points, or 5.32 per cent, to end at 11,274. During the session, the 30-share index of BSE rallied 2,284.55 points or 6.32 per cent to hit a high of 38,378.02 while Nifty surged 677 points or 6.32 per cent to 11,381.90 levels. 

The domestic investor wealth soared by nearly Rs seven lakh crore on the BSE. 

Market experts hailed the decisions, saying these were long overdue and would certainly act as a force multiplier for India’s flagging economic engine, as well its position as one of the most attractive business destinations. 

"By slashing the corporation tax rate to 25 per cent from 35 per cent (22 per cent from 30 per cent without exemptions) for existing domestic companies and an extremely attractive rate of 15 per cent for new companies setting up manufacturing operations after October 1, 2019, and commencing operations before March 2023, the government has rolled out a red carpet that would ensure hundreds of billions of dollars in foreign direct investments (FDI) and foreign institutional investor (FII) flows in the medium term," said Ajay Bodke, CEO PMS Prabhudas Lilladher.

A K Prabhakar, head of research at IDBI Capital, agreed. "Reducing corporation tax rates is the best thing FM Sitharaman has done so far. Initially, there could be some losses, but for the long term it is an extremely positive decision. We were one of the countries with the highest corporation tax rates in the world. Even the US is slashing the rate. Hence, this is a welcome move," Prabhakar added.

Is the market rally sustainable?

Most analysts believe the market rally is sustainable. However, they see a bigger recovery in broader markets than in the frontline indices. For instance, G Chokkalingam, founder & managing director of Equinomics Research, says: "Frontline indices are likely to see volatility owing to global factors, but second-rung stocks will see a solid recovery."

Prabhakar, meanwhile, is extremely bullish on the market and sees Nifty above the 12,500 level by the end of December 2019.

Will the move spur manufacturing growth?

Friday’s move will be marginally positive but that alone might not be enough to boost manufacturing, points out Chokkalingam. The performance of the manufacturing industry depends on a number of variables, such as the ability to compete with imported stuff, demand and capacity issues — whether there is surplus capacity or capacity constraint. But, it is certainly a good move," the market expert opined.

 Independent market expert Ambareesh Baliga said the move would certainly make a lot of difference. "This would mean a lot of capex (capital expenditure), which, in turn, would mean a lot of employment and a huge demand for Indian infrastructure-related goods. This should in fact aid the government's 'Make in India' programme," Baliga said. The only thing required now is ensuring a regulatory stability, the market veteran added.

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