In the late 1990s in the US, there existed what was called the ‘Greenspan Put.’ Every time there was a significant stock market correction, Alan Greenspan, Chairman of the Federal Reserve would cut interest rates. The Federal Reserve Chairman was responding to variables in the real economy such as growth and employment which accompanied a market correction but his actions also had the direct effect of supporting the stock market. In the weeks following the 2019 Budget, as the stock market trended lower, Finance Minister Nirmala Sitharaman mirrored these actions. She held a series of press conferences to improve sentiment by making announcements on taxes for investors, bank consolidation and real estate. The 4% odd jump in the Nifty today (as of 12:53 pm) came shortly after the Finance Minister’s latest and most significant announcement - a corporate tax cut.
India’s equity markets have had a torrid time over the past year, reflecting pain in the real economy. The benchmark Nifty 50 was down 4.35% over the past year (as of 30th August) while the Nifty Midcap 100 was down a much sharper 20.63%. These figures are for total returns which includes dividends. The selloff accelerated after the Union Budget presented on 5th July when a new surcharge was introduced for high income individuals and Foreign Portfolio Investors (FPIs). Market concerns were voiced to the Finance Minister on social media and in various meetings she held with bankers and industry leaders.
The Finance Minister on 23rd August first announced a roll back of the tax surcharge on Foreign Portfolio Investors (FPIs). On 30th August announced a merger of various government owned banks. On 14th September, she followed it up with some announcements related to real estate and the setting up of an Alternative Investment Fund (AIF) to finance projects near completion which needed funding. In the fourth press conference today (20th September), Nirmala Sitharaman announced a cut in the headline corporate tax rate from 30% to 22%. After accounting for surcharges the actual tax falls from around 35% to 25%. The tax cut has been extended to companies which do not avail of exemptions and deductions.
“The Government actions are actually more powerful than the Greenspan Put which was more focused on monetary policy. The Government is using fiscal policy through tax cuts and it is trying to improve liquidity," said Shyam Sekhar, Chief Ideator and Founder, iThought a financial advisory firm.
“Equity investors should feel a level of support from policy action when conditions worsen," he added. However fund managers expressed some skepticism about the strength of the recent Government announcements. “The last three announcements of the Government had at best, only a midly positive effect on the stock market. Government has to target economic revival through multiple steps and that is what they seem to be doing. Today’s measures are part of that and should not necessarily be interpreted as Sitharaman Put. Also a lot more needs to be done in terms of structural reform to revive the economy," said Rahul Singh, Chief Investment Officer (CIO) for Equities at Tata Mutual Fund. Rajiv Thakkar, CIO, PPFAS Mutual Fund said that the present move is more about correcting past mistakes. “India was one of the highest corporate tax jurisdictions in the world if you consider Dividend Distribution Tax and Buyback Tax. The latter two taxes remain on the books." However he noted that the Finance Minister’s announcements do acknowledge the dampened economic sentiments across the board and try to improve them.