Structural stimulus sets stage for market recovery, says Ajay Bagga – News Air Insight

The Indian government’s recent tax cuts and liquidity measures are being viewed as a structural boost for consumption, even though the immediate market reaction has remained subdued. Market expert Ajay Bagga believes the reforms could pave the way for a broader economic recovery once demand patterns settle over the next few months.

Speaking to ET Now, Bagga said the latest moves from the government and the central bank have injected lasting stimulus into the economy. “Well, I would not say that things will change very much. What is changing is it is a very structural stimulus that has gone in and this stimulus will go in year after year now unless there is the rollback into higher rates which we do not anticipate,” he noted.

While the markets have not responded with significant enthusiasm in the short term, Bagga pointed to the combination of lower interest rates, monetary policy liquidity, and income tax adjustments as factors that could strengthen household spending. “The immediate reaction of the markets might have been muted, but what I am expecting is that all the interest rate moves that have come in, the monetary policy liquidity being injected, overall the income tax slabs putting on the margin some more money into people’s hands. We have seen rural demand growing stronger than urban demand. So, the catch-up story the markets are waiting for is urban demand picking up,” he explained.

Festive demand in the coming two months will be key to understanding the trajectory of urban consumption, Bagga emphasized. “Does this lead to urban demand picking up? We will know in the next two months. But a very good structural stimulus has been injected by the government. What trends will it change, will the premiumization move to a more broader based rally, that we have to see, but definitely there will be more money in people’s pockets after their usual spends and that normally goes back into consumption,” he said.

Bagga highlighted that the consumption multiplier effect typically works well when taxes are reduced, adding that the government’s approach was sound. However, he also flagged pending issues. “There are some issues to be ironed out like the input tax credit, then the anti-profiteering to ensure that companies pass on these advantages to the customers, those two remain the issues which have made the markets muted. But if you take all this together, we are setting up for a good market recovery. When that comes, what is the catalyst, we will have to wait. Maybe this is the catalyst that we will know after about two months when we actually see how the festive demand passes through,” he added.