Indian Corporate Tax Cuts: The Spark that Lights the Fire? | BetaShares

Indian Corporate Tax Cuts: The Spark that Lights the Fire?

BY Adam O'Connor | 23 October 2019
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India corporate tax cuts

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Late last month, the Indian Ministry of Finance announced a large reduction in the base corporate tax rate from 30% to 22%, including a preferential tax rate of 15% for new manufacturing investment. The effective tax rate will be cut to ~25% (after surcharges and levies) vs. ~35% currently.

These reforms represent a significant shift in economic approach – turning to fiscal policy to stimulate investment-led growth by boosting corporate profits, incentivising domestic capex and making India more attractive to foreign manufacturing investment.

Positive impact on corporate profitability

According to estimates from Goldman Sachs, 61 out of 79 MSCI India stocks (~75% of the index weight) currently have an effective tax rate above the new tax rate of 25%1. The reduced rates imply a tax saving of ~US$6bn for the MSCI India index broadly and a ~9% boost to FY20 profits.

India open for business

Beyond simply improving corporate profitability, the tax reforms are significant as they bring the Indian tax rate for manufacturing in line with other low-rate jurisdictions in the region like Singapore. They also have the potential to reposition India as an alternative to China for labour-intensive manufacturing. With the China-US trade tension ongoing, many multi-nationals may be looking to diversify their global manufacturing bases and shift regional production to India, particularly as tariffs kick in and exports from China and the U.S. become more expensive.

We have already seen this happen earlier this year when Taiwan’s Foxconn – the world’s largest contract electronics manufacturer and the biggest assembler of Apple product – shifted production of new iPhones from China to India.

Structural Growth

In a low interest rate and low-growth world, areas that offer secular growth should command a greater premium. This is because secular growth isn’t necessarily tied to the global macroeconomic environment the same way cyclical growth is. We believe a number of structural tailwinds continue to make India attractive from an investment perspective. India retains very strong economic trends by virtue of its large population and favourable demographic trends, and also low rates of urbanisation and per capita income – a combination much of the developed world lacks.

  • India’s population is predicted to surpass that of China by 2027, yet it will have a median age by then of just 30 versus 40 in China2. Over the next decade, India will likely add the largest number of workers of any country to the global workforce.
  • Relatively, this means it will have a much lower dependency ratio (the ratio of nonworking dependents to working adults) and potentially higher productivity.
  • India has recently invested heavily in its education system – primary school enrolment and college enrolments are already on par with China.
  • Investment in infrastructure and roads is improving connectivity – 22 cities in India have plans to build mass transit rail systems with 11 already operational.
  • Finally, domestic consumption as a proportion of GDP at 60%3 is high by global standards, providing a degree of insulation from global trade tensions relative to other emerging market economies.

 

The BetaShares India Quality ETF (ASX: IIND)

The BetaShares India Quality ETF (ASX: IIND) offers Australian investors a convenient way to get exposure to a high quality portfolio of Indian companies.

IIND’s index methodology focuses on quality companies (those that score highly on financial metrics such as high return on equity, moderate to low leverage and good historic earnings stability). It also has an equally-weighted mix between large and midcap Indian companies to provide a better representation of India’s economy.

India has one of the most concentrated stock markets in the world, meaning that under a traditional market-cap indexing approach such as the Nifty 50, a small number of large-cap companies generate most of the returns of the index. IIND’s methodology, incorporating a quality filter as well as a blend of both large and midcap companies, mitigates the potential for a small number of companies to dominate returns.

 

[1] Source: Goldman Sachs

[2] Source: UN World Population Prospects 2019

[3] Source: World Economic Forum

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