The Union Budget is one of the most anticipated events in the economic calendar, often leading to significant fluctuations in the stock market. Investors, businesses, and analysts closely scrutinise the Budget proposals to gauge how government policies will affect different sectors of the economy.
This year, with Nirmala Sitharaman presenting her eighth consecutive Budget on February 1, the stock markets are set to remain open on Saturday, which is a rare occurrence as markets are typically closed on weekends. As Budget Day approaches, let's explore how it influences the stock market.
One of the key expectations from the Budget is that it promotes economic growth. The stock market usually reacts positively when the Budget includes measures aimed at boosting the economy. This could include new initiatives like tax cuts, investments in infrastructure, or incentives for businesses. When the government introduces such reforms, it boosts investor confidence, leading to a rise in stock prices.
Putting More Money In People's Hands
The stock market also reacts well to measures that increase the amount of money people have to spend. These include tax reductions, direct income transfers, and efforts to control inflation. When people have more disposable income, they spend more, helping businesses grow. Sectors like retail, automobiles, and consumer goods often benefit from such changes, and as a result, their stock prices rise.
Changes In Taxation
The Budget often introduces changes in taxes, which can have a big effect on the stock market. On one hand, tax cuts for both individuals and businesses increase disposable income and corporate profits. This can encourage more investments and boost stock prices. On the other hand, if taxes are increased, it could lower spending and affect the market negatively.
The Budget also affects taxes on profits made from selling stocks or dividends received from companies. Lower taxes on these profits can encourage people to invest more in the stock market, leading to higher stock prices. However, higher taxes on capital gains and dividends could discourage investment, which would negatively affect the stock market.
Mutual Funds And Bonds
The Budget impacts the market for mutual funds and bonds as well. The government may announce measures that make investing in mutual funds more attractive or change the taxation on bonds. For example, including Indian government bonds in global investment indexes can attract more foreign money, which helps the stock market grow.
Fiscal Deficit
The fiscal deficit refers to the gap between the government's income and expenditure. A high fiscal deficit usually means the government needs to borrow more money, which can increase inflation and interest rates, affecting businesses negatively. Conversely, a lower fiscal deficit is seen as a sign of sound financial management, which can positively impact the stock market.
Previous Budgets
In the past, certain Budgets have had a big impact on the stock market. For example, in 1991, India's economy was liberalised under the leadership of then-Finance Minister Manmohan Singh, and this Budget set the stage for huge market growth in the following years. Similarly, the 1997 Budget by P Chidambaram, which reduced taxes, was also well-received by the stock market.
