23 bps fiscal slippage, higher sell-off target: Emkay

Mumbai, Sep 23 (IANS) The tax cuts on corporates can lead to a fiscal tightrope walk of 23 bps slippages and there can be step-up in divestments proceeds to Rs 1.35 trillion as well as curb in public expenditures to meet the shortfall, said a broking house-analyst report from DBS-Emkay.

"The tax revenues let go off through this announcement could add to the fiscal strain of the government. We believe this will be offset by - higher disinvestment activity (we pencil Rs 1.35 trillion vs. budgeted Rs 1.05 trillion) including possible strategic divestments, higher dividends/buybacks by PSUs and as a last resort might lower public expenditure (capex). In spite of these assumptions, we see about 23 bps fiscal slippage. This could lead to yields hardening. However, overall, the non-inflationary nature of these actions could still allow the RBI to go for a 50 bps rate cut in October MPC", the DBS-Emkay report said while adding the tax cuts are a bold step to revive economy.

The government has projected Rs 1.45 trillion in revenue losses to come from this announcement (this is 19 per cent of the budgeted corporate tax receipts of the government for FY20), leading to a 6 per cent decline in corporate tax receipts year-on-year, it said

"Our analysis of BSE-500 companies, whose tax contributions account for one-third of all corporate tax receipts of the government, should see a 12 per cent drop in their tax bill on their FY19 numbers. Thus, the government math does not seem too off. This move along with excess transfers from the RBI might have an impact of 30-40 bps on fiscal deficit. This gap of Rs 0.9 trillion may need to be offset by either curbing expenditure, or disinvestments in excess of target of Rs 1.05 trillion", the report said.

The Finance Minister on Sunday said as of now there is no plan to revise any of the Budget targets and will be looked at the revised estimates stage.

In a surprise event, the government on Friday announced sharp cuts in corporate tax rates. At the new tax slabs, India becomes aligned with regional peers, and indeed offers among the best tax rates for new manufacturing facilities, it said.

"We see these measures as bringing India back into favour for FPIs: after factoring in just the base tax benefit increase of ~8.5 per cent of large-cap indices, India's PE premium over EM is still well below historical averages (35 per cent vs. 52 per cent during Modi's first term), even after Friday's rally.

"We thus expect India to see a return of foreign flows -- or at least stop underperforming other EMs on flows -- thus overall supporting valuation multiples. Impact should play out over multiple years and the first-order benefit of the cut is of course the immediate impact on corporate profitability. In our analysis, Nifty EPS should see ~8.5 per cent EPS benefit (all else unchanged). The second-order benefit could come from how companies choose to use these savings like price cuts to pass on to customers (we expect them from some chemical and consumer-facing companies), higher spends to grow business (advertising and promotions), and the kick-start of small ticket/brownfield capex.

"Large-ticket capex could take some time to revive, given the continuing bottlenecks such as land acquisition and clearances. The third-order impact, in terms of FDI/strategic foreign investments into India, could take a while, but the foundations have been firmly set with the rationalization of taxes," said the report. Our first-cut analysis of the Nifty-50 stocks suggests about 20 Nifty stocks should see in excess of 10 per cent earnings upsides due to this announcement, while the Nifty as a whole should see 8 per cent EPS benefit for FY21, it pointed.

The report also added the government's big fiscal push through tax cuts should make India competitive. Slashing the corporate taxes, although hits the fiscal deficit space, could attract FDI inflows (where the focus is shifting from China) and kick start the private investment cycle. This impact, unlike the cash dole outs, may not be very inflationary. This, along with accommodative monetary policy, can have a positive impact on growth, it said.