Why the stock market flies despite an upcoming recession?

Big companies like #byjus are firing their employees citing financial concerns but the #stockmarket is still going very smoothly.

In short rich is getting richer and the poor is getting poorer!

Let's understand some aspects behind it.

So, there is a theory called as trickle-down #theory . Which suggests that if the big companies are well off then the poorer section of the society will get better as the Company will pay well its employees who will consume more and will generate more jobs in the ecosystem.

For eg. if a #unacademy employee is getting well paid, he will buy more clothes, watch movies, hang around, will have a maid in her house and a lot of other things to ensure liquidity in the market.

The government which major aim is to secure livelihood of its citizens knows this very well and thus provides various incentives to these big companies. The incentives are like tax cuts, cheap land allocation, reduction in government procedures, etc etc.

A good example for this is that the Gujarat government gave a loan at just 0.1% interest rate to #tata to setup their #nano factory.

But suppose a company is unable to sell its products and predicts a recession then what will it do?

It will simply cut down the production, which will result in laying off of employees. If employees lose their job, they will spend less and thus the overall economy is into shatters. The maid in her house will lose her job, right?

So here the government again comes to the rescue. It will simply provide additional incentives to the company like cutting down its tax and help the company to sustain this bad patch. In return it will motivate the company to retain its employees.

Let's understand this with an example.

Suppose in a normal situation a company earns Rs 100 crores and has to pay 30% tax then it will be left with Rs 70 crores. Out of these Rs 70 crores the company has to pay Rs 10 crores as salary to its employees. Hence, the company is left with Rs 60 crores for itself.

But in case in a financial year the company is unable to sell its products and earns only Rs 80 crores and further expects a recession. Then it will reduce its production and lay off its employees.

To avoid this, the government may provide a tax cut to this company and ask it to pay only 10% for that financial year. After paying this 10% tax, the company will be again left with Rs 70 crores. So, the company is again left with the same amount of money and has no need to lay off its employees.

Hence the company is saved, thousands of jobs are saved and hence the economy is saved.

Easy and wonderful right!

But this is just a theory, but the practical world situation largely differs from this.

Let's see how, when a government provides a tax cut to a company to protect itself and avoid laying off of employees, the company will take the tax benefits and still lay off the employees.

Why? Because it still has to pay Rs 10 crores as salaries to its employees. And it chooses to show larger profits to its investors rather than retaining its employees. This will increase the price of its share and make the #shareholders richer.

On the other hand, the laid off employees are not left with money, and this further passes on to the lower rungs of the society making a chain of financial distress in the society.

You see how the companies fool the government and its employees.

But wait, don't you feel the government is also involved in this? Because if it is providing a tax cut to the company to protect the employees and still the company is laying off the employees then shouldn't it take strict actions against the company? Shouldn't it tax back the tax exemptions or even punish the company with more taxes?

I leave this to you.