Expectations of a surge in consumer spending and a rise in demand for consumer finance, after Union Finance Minister Nirmala Sitharaman’s budget announcement to make income up to Rs 12 lakh tax-free and reduce taxes across all income categories, has led to a surge in the share prices of finance companies.
While shares of Bajaj Finance, country’s largest finance company jumped over 5 per cent on Monday, and have now risen by 6.85 per cent over the last two trading sessions, several other finance companies witnessed a rise in their share prices on Monday. Among others, shares of L&T Finance rose 2.4 per cent, shares of Mahindra & Mahindra Financial Services gained 2.95 per cent and that of Shriram Finance was up by 2.75 per cent.
What is the expectation from FM’s announcement?
If nearly 1 crore tax payers are expected to save anywhere between Rs 25,000 to 80,000 on account of the decision to raise the rebate limit from Rs 7 lakh to Rs 12 lakh, around 75 lakh more are set to save up to Rs 1.1 lakh on account of the government’s decision to tweak the tax slabs and rates, say government sources.
While the government has said that it will forego tax revenues of around Rs 1 lakh crore on account of these decisions, nearly 1.75 crore tax payers are set to save this money. Finance ministry officials, economists and market experts believe that the rise in disposable income of up to Rs 9,000 a month is set to boost the demand in the economy as individuals will spend a part of these tax savings to fund the purchase of consumer durables, two wheelers, cars among other items and thereby push demand in the economy.
How will it benefit finance companies?
Though it is expected that individuals will use their tax savings on spending market experts say that the savings will enhance the leverage ability of the individuals and they will borrow from finance companies to buy consumer durable items available on no-interest EMIs that are provided by finance companies for a period ranging between 3 months to up to 24 months. While taxpayers can spend multiple times their tax-savings by way of leverage, it will enhance the lending business of finance companies and their profitability too.
“I believe that the tax savings of Rs 1 lakh crore by taxpayers will have a multiplier effect as they can leverage and can spend multiple times of that amount. However, it will benefit our economy if they are consumed within our country and on largely domestic items. Finance companies will benefit as the tax savings will enhance the borrowing ability of these individuals and they will borrow from them to spend,” said the CEO of a mutual fund who did not wish to be identified.
He further said that a person who will save around Rs 8,000 a month can spend ten times or even higher of that monthly saving by borrowing from a finance company. For Example if a television or a phone worth Rs 50,000 each is available on zero cost EMI (for 12-months), the individual can buy both and pay for them over the next 12-months by way of EMIs that he can service through his tax-savings. “This may have a multiplier effect on consumption in the economy,” he said.
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