THE PREMISE that a rise in the profitability of companies following the reduction in corporate tax rates announced Friday will lead to an uptick in private sector-led investment appears to be an optimistic one. Reason: The top 500 companies in India held cash or its equivalent of over Rs 8 lakh crore in their books and therefore lack of funds was not really a deterrent to fresh investment.
According to analyst estimates, BSE 500 companies had cash and cash equivalent of around Rs 8 lakh crore as of March 2019. While Infosys had cash and cash equivalent, along with other bank balance, amounting to Rs 19,568 crore, TCS and Wipro had Rs 12,848 crore and Rs 11,707 crore, respectively. Interglobe Aviation, which runs budget carrier IndiGo, and L&T had Rs 8,606 crore and Rs 7,597 crore, respectively.
While they have been holding on to their cash and not investing, experts say the government’s announcement may nudge them to deploy their cash in the economy in the hope of better return on capital — the investment push might come in with a lag, though, and the knock on impact on consumer demand is likely to be minimal.
Given that rated non-financial companies in India reported a total pre-tax net income of about $35 billion (around Rs 2.45 lakh crore) for the fiscal year ended March 2019, assuming their earnings remain unchanged for fiscal 2019, they will end up saving about $3 billion (over Rs 21,000 crore) from the tax rate reduction, according to Moody’s Investor Service.
The extent of improvement in corporate credit profile, though, will depend entirely on whether the companies choose to reinvest surplus earnings into their businesses, or simply to reduce debt or to boost shareholder returns.
Market players, however, say the decisiveness of the government to step in and pilot proposals to turn around the broader sentiment is the biggest uptake of Friday’s booster dose of incentives.
“The biggest boost is on the sentiment front. Earlier, private investments were not happening because profits were not visible. However, now companies will find it more attractive to invest as they will get better return on capital and their break-even time will also get reduced,” said Nilesh Shah, MD, Kotak Mahindra Asset Management Company.
“The cut in corporate tax rate will surely push the return on capital higher for companies, thereby making a good case for investment. Overall, it will have a profound impact across sectors creating demand, export competitiveness and private sector investment,” said Pankaj Pandey, head research at ICICI Direct.
If 5-10 per cent cut in tax rates may significantly improve the export competitiveness of Indian exporters, market participants say it will help consumer-oriented companies to pass on the benefit of lower tax to the consumer, thereby reviving demand. It will help leveraged companies improve free cash flows and debt-equity profile, and enable companies in automobile and some other sectors to go ahead with investment in new technology.
“Exports will witness a big boost as it improves the margin of exports to compete in the global market. India should give preferential access to investors who are leaving China on account of the US-China tariff war. India should emerge as the landing place for them and the low tax rate of 15 per cent for new manufacturing units will help the cause,” said Shah.
However, some feel that the investment may not just depend on cut in tax rates as there are other factors that have hurt the investment climate. “Corporates are happy to see a meaningful cut in their tax rates but what is holding them from investment is low capacity utilisation and overall fear in the ecosystem. The government should look to address the harassment by tax authorities and enforcement agencies,” said the head of a financial services firm, speaking on condition of anonymity.
However, he is hopeful that the government will address these issues. “The government has given a powerful statement and they have shown the intent that they can go to any extent to revive the economy and push investment and job creation. Therefore, I am hopeful that other issues will also get addressed,” he said.
Private investment in the economy has stood very low over the last few years. While the year-on-year gross bank credit growth had slipped to under 5 per cent in mid-2017 post demonetisation, it witnessed recovery in 2018 primarily on account of credit demand by the services sector and hit 13.6 per cent in November 2018. For July 2019, while the bank credit growth stock lower at 11.5 per cent, that for industry and services stood at 6.1 per cent and 15.2 per cent.