Corporate Tax Cuts To Boost Earnings Growth Outlook, Says Ridham Desai

India’s move to lower corporate tax rates alters the bad sentiment plaguing the capital markets and straight away boosts the earnings growth outlook.

That’s according to Ridham Desai, managing director and head of equity research at Morgan Stanley India.

“[Indian government] has altered future cash flows to eternity by above 10 percent with one stroke of the pen,” said Desai in an interview to BloombergQuint. “Our earnings forecast is that we can see two back-to-back years of 20 percent-plus growth [for financial years ending 2020 and 2021]. It is safe to say that there is no country on the planet with that type of earnings outlook.”

It [lower corporate tax rate] also alters the potency of previous announcements of the finance minister—merger of PSU banks, liquidity window of NBFCs, real estate fund and a slew of other measures,” he added.

Desai said the “idiosyncratic” factors such as higher government expenditure and a global growth slowdown are already phasing out in the second half of the ongoing financial year.

The only drag on the economy are the prospects of a global recession, he said, adding that it could be overcome by resolution of the trade dispute between the U.S. and China.

Last week, Finance Minister Nirmala Sitharaman slashed the corporate tax rate for domestic companies to 22 percent and new domestic manufacturing companies to 15 percent. The move is expected to cost Rs 1.45 lakh crore to the government.

Other Highlights From The Interview

• Lowering of taxes is a trigger for higher earnings growth to return.
• Rising share prices due to the tax cut announcement can actually boost the real economy.
• Companies are likely to reinvest the profits saved due to lower tax into new capital investments.
• The benefits extended to manufacturing companies over the next few years as there is no sunset clause.
• Reserve Bank of India has further room to cut interest rates; expecting a 25 basis point cut in October.

WATCH | Morgan Stanley’s Ridham Desai On Corporate Tax Cuts