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February is almost here. The first few days of February are dedicated to watching the news in every Indian household. Did you already guess what we are talking about? Yes, it is the union budget.
With February round the corner, there is a lot of focus on the upcoming budget. In today’s article, let’s discuss the significance and effect of the budget on the stock market and the whole economy.
What is the union budget?
Budget is a term we all use often. It is as simple as planning our income and expenditure for a specific period. Similar to what we do for our personal lives, the government does it for the country to organise India’s income and expenses. This process is called the union budget, also called the country’s financial statement.
Indian financial year begins on 1st April and ends on 31st March of the following year. So, the government plans the budget during the first month of the calendar year and announces it to the public on 1st February every year. This gives the government and the public sufficient bandwidth to plan for their strategies for the future months.
Significance of union budget
The budget primarily focuses on allocating funds across various programmes to enhance the country’s economy. The objective of the budget is to reduce poverty by improving employment opportunities across different classes of citizens. It also deals with the prices of various goods and services, which directly affect consumers.
Another significant part of the budget that has paramount relevance to citizens is the country’s tax policies. The government declares income tax rates and slabs applicable to different income levels, which is essential for citizens to plan their investments and savings.
Impact of budget on the stock market
The government’s objective behind planning the budget is to have a significant impact on the economy. While the aim is to improve the economy positively, some policies may not work as expected. However, every sector of the economy is affected by the budget, and the stock market is no exception to this.
Below are some consequences of the Indian budget on the stock market.
Interest rates
Interest rates are one of the key decisions communicated through the union budget. It recommends the interest rates on borrowings for the upcoming financial year.
Interest rates and the prices of stocks share an inverse relationship. Increasing interest rates lead to and increase in borrowing costs, making it difficult for companies to raise funds. Besides, a higher interest rate makes it hard for investors to arrange funds, too. Hence, they will prioritise saving over investing in the stock market.
So, with an increase in interest rates, companies face a challenge in arranging funds, either through debt or equity. This impacts the firm’s operations, bringing the share prices down. Conversely, a decrease in interest rates works well for the stock market. Availing capital becomes easier, benefitting the performance of companies, thereby increasing the prices of their stocks.
Tax rates
The direct and indirect tax rates for the upcoming year have a considerable impact on the stock market.
Rising income tax rate reduces the disposable income. So, investors channel their money into other critical needs than investing in the stock market.
Similarly, an increase in indirect tax rates, such as GST rates, also affects disposable income since consumers spend more on goods and services. So, this affects the amount they are willing to invest in the stock market.
The government’s policies on short-term and long-term capital gains are also essential while investing in the stock market, as these tax rates directly impact an investor’s profits
Subsidies and incentives
The government announces various incentives and subsidies towards certain sectors and business themes in the union budget. This positively impacts businesses as arranging funds becomes less expensive, leading to a boost in profits. The stock prices of such companies rise, improving the condition of the stock market as a whole.
Government’s expenses
The government, in its budget, announces infrastructure plans for the upcoming year. This positively impacts all the industries associated with such plans.
For example, if the budget focuses on spending on the construction of metro lines, all stocks associated with metro construction benefit and their share prices increase.
Bottomline
Whether you are an investor in the stock market or not, the union budget is important news for every citizen in the country since it impacts one’s day-to-day lifestyle. Besides personal consequences, investors have an added impact as the budget’s effect on the share market is severe. Hence, going through the budget thoroughly and planning the upcoming year is crucial for every individual.
Also read: Insert <interim budget> blog
FAQs
According to various research reports, it is noticed that the market slows down before and on the budget date owing to uncertainty. It gradually picks up based on the policies released in the budget.
It purely depends on the policies of the budget. If the tax rates increase, the market may take a while to recover as people have fewer funds to invest and vice versa. However, based on the government’s plans, some sectors may benefit, and the prices of those stocks rise.
The three main types of government budgets are – Surplus, deficit and balanced budgets.
Surplus – Where the government’s revenues are greater than expenses
Deficit – Where the government’s revenues are less than expenses
Balanced – Where the government’s revenues and expenditure are nearly equal
The budget is passed when the current Finance Minister in India presents it to the members of the Lok Sabha. The process is telecasted live on news channels for the public’s awareness.
A full-year budget is where the current government plans the income and expenditure for the entire upcoming year. An interim budget is a short budget for a few months. It is a stop-gap arrangement made when the government is expected to change in the near future.