Monthly Archives: September 2019

A huge change

dear readers,

i avoided giving a fancy title as when you feel huge by a thought 💭 you don’t need to overcoat it.

on friday, india unleashed what I think is perhaps the biggest single day reform in several decades.

It is not just about the tax cuts, it signals a clear breakdown of the dark clouds surrounding a belief that the govt won’t do anything to boost corporates and is focused only on one segment of India which is the rural market.

while people debate on the impact of the tax cut in terms of fiscal deficit and govt spending, history bears testimony to the fact that countries have seen huge growth in profits and have unleashed huge capex through revival of animal spirits. Usa 🇺🇸 saw its biggest rally recently on a similar move. In fact far from monetary easing this is an extremely prudent and progressive move by the finance minister and well worth it.

the move has a huge impact on many fronts. Most leading banks now see a surge in profitability and hence with impending rate cuts would be able to benefit by passing more benefits to consumers, in a recent interview, Mr Aditya puri, signalled good times and hinted at giving customers more benefits by cash back, discounts from manufacturers. With more profits, he as a proxy to private banks can stimulate more discounted deals and not impact his profits. We all know Indian consumer loves discounts (except in the stock markets where he behaves without similar rationality).

the much plagued auto sector is in for a bonanza. While history suggests autos go through such cycles, the immediate impact of this move is auto plants being set up now will attract 15 pct taxes in perpetuity. In basic economics there is a concept of economies of scale and in marketing the power to attract and pass benefits with more in pockets. I am not a believer that better deals and discounts from autos will not address their problems. Already there profitability even at 22 pct is significantly better than one day before. Many cos are resorting to interesting models based on literal lease of vehicles rather than outright buy and from what I hear from few companies the response is encouraging.

the govt move also signals a friendly approach to capital markets. In case you missed it, please go through the opening statements made by FM where markets were addressed. Even in terms of tweaking surcharge not to apply for capital gains where stt is paid there was a look in. This Is perhaps the first salvo by the govt to get capital market friendly and thus a mindset change. A good capital market feel can be a huge catalyst to both attract investments, retain preference for equity over other investment classes, capital raising by listed and yet to be listed companies and to trigger better realisations in disinvestment, an area of concern for the govt. in addition, by doing nothing more than the announcement, on a status quo  basis, the pe of the market has been reduced by a whopping 13 odd percent.

the govt move is also likely to attract huge fdi. There are many plus points here. One is fdi merely by consistency. A lower codified tax structure brings in certainty of a rate that was missing. The lower rate adds competitiveness to production and hence changes the blueprints of returns on that. All this in an environment when leading companies in the world, particularly USA based companies are re considering china. As we speak, our PM is in USA and there is a further possibility that India 🇮🇳 will strike a deal with USA 🇺🇸 as it appears to be placed well to becoming the next big manufacturing base for Asia.

india is a highly inter connected country. Solving one problem such as liquidity for one participant solves problems for many. On Friday, we saw a whopping newly rs 2 billion inflow into a private bank. Ease of liquidity is a big positive as it fuels a lot on the side of both consumption and capital expenditure. Liquidity is itself a function of mood. If I feel good about my future, I spend more or invest more. If I feel worried, I hold back all decisions. In recent months we saw a lot of holding back. Even when consumption benefits, it places a lot of orders to expand production, distribution, ad campaigns,  outsourcing and employment.

i don’t think it was debated that the slowdown in India was temporary. Even the biggest pessimist spoke of few quarters of impact till things resolved. What the govt has done is to fast forward India to a state there the few months have been reduced. India saw a few upgrades on Friday post closing itself and could well see more.

One should also not ignore that when investments are made they are made with the mindset of a friendly environment. No one cares is not a temperament to invest either for businesses, institutions or individuals. The addressing of we may not be perceived to care to we surely care is perhaps one of the biggest catalyst for a better India.

I don’t personally think the market move on Friday was a surprise, a one off or as some call it short covering. I feel the months ahead will be positive, promising, exciting. It’s again a great time to over weight equity. I will be surprised if in the next few months the rally doesn’t broad base. About 65 pct of the nifty gains came from a handful of stocks. Like I said india is too interconnected through consumption. India bounced back to consume post demonetisation and surely will bounce back soon post this Great reform.

the best part is this is just the beginning. An attitude change never stops at the first reform. I think we have finally unleashed a new INDIA.

Disc- view is personal. Am not a Sebi Regd advisor. Pl seek the views of your advisor and do things commensurate to your risk profile and temperament. No spell check done. Views are most welcome.

 

 

 

 

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