6 mins read . 18 Jan 2023
Will the budget impact markets and will this be a stock market budget? In fact, if you look back at the last 25 years of Union Budgets, the budget impact on stock markets has been one of the most discussed topics. The impact of budget on stock market is both, direct and indirect. In fact, the budget impact on share market arises from factors like a more conducive environment for investors, treatment of capital gains on equities, taxation of dividends, reforms process; and the list can go on. The bottom line is that the budget effect on share market remains an area of interest and cannot be wished away.
In this segment, we look at the budget effect on share market as well as the impact of budget. The budget and stock markets have a love-hate relationship for a long time. Generally, the stock market on budget day tends to show wild gyrations, although things do stabilize over the next few days. Here we look at the effect of budget on stock markets as well as take a trip down memory lane on the budget day share market history.
Union Budget 2023 will be the last full budget presented by the current government. Since the general elections are slated to be held in the year 2024, the next Union Budget in February 2024 would, most likely, be a vote on account. Normally, Indian elections are held in May and the government formation happens by end of May. Hence the full budget for 2024 would be presented in June after the new government takes office. As the Finance Minister presents Budget 2023, there are several imperatives. Firstly, there are a slew of state elections that are coming up in the current year and hence the government would try and keep it a people-friendly budget. Secondly, there is the all-important central elections coming up in 2024, so the government may not anything too drastic in this Union Budget.
Having seen the political backdrop, let us also dwell on the economic backdrop to the Union Budget. It has been a tough last 3 years for the Indian economy. Indian economy has recovered from the economic lows of the COVID pandemic, but it is 3 lost years in terms of growth. Also there are other headwinds for the economy at the global and domestic level. Global hawkishness is likely to be a dampener for growth, since it raises the cost of funds. Also, the US, UK and EU are tipped to get into recession by the end of 2023 and that would also be an overhang for the export driven sectors as well as the IT sector that relies on IT spending. Above all, high inflation and supply chain constraints are still real. That would cap any response of the market indices to the Union Budget 2023.
In the last 10 years there have been a total of 12 Union Budgets. That is because, in 2014 and 2019, there were two budgets presented before and after the elections. How did the Nifty index perform on these 12 budget days? It is an even steven case with Nifty ending higher on 6 budget days and Nifty ending lower on 6 budget days. The best return of 2.8% was on Budget day in 2017 while the worst return was -3.8% on budget day in 2020. However, if you consider the Nifty one day after the budget, then the Nifty has been down on 7 out of the 12 occasions. The inference is that there is not much of a trend visible with the odds evenly spread out.
The markets understand that there is not much leg room for the government. Also, the government would not want to embark on drastic reforms just a year ahead of the general elections. However, three announcements can positively impact the stock markets. Firstly, an assurance on a rapid reduction in fiscal deficit will be a positive. Secondly, focusing more spending on capex and less on subsidies will also be a positive. Lastly, scrapping of long-term capital gains tax on equities can go a long way. For now, we must wait for Budget day!