Impact of Union Budget on Indian Stock Market

The Union Budget of India contains a list of financial proposals and estimates and is generally referred to as the ‘Annual Financial Statement’ under Article 112 of the Constitution of India. As the name states, the country’s budget is prepared for a respective financial year which involves estimates of earnings from revenues and expenditures of the government. The Budget is seen as the financial roadmap and is a lengthy process as it requires months of gatherings from central and state ministries, authorities and departments. The performance of last year’s budget is taken into account while preparing budgeted estimates and guidelines for the coming year.

Since Independence in 1947, the Indian government has presented a total of 73 annual budgets, 14 interim budgets and 4 special budgets.

An interim budget or a ‘vote of account’ is announced generally during an election year. The interim budget comprises a complete set of accounts including both revenue and expenditure. However, after the success of an election, the winning government announces the full budget later on and changes are possible in the final document than those presented in the interim budget. The interim budget is the estimate of accounts for the next two to four months.

How Does the Budget Impact Stock Markets?

The Union Budget of India has a significant impact on the country's economy, interest rates, and stock markets. In general, stock market performance reflects the state of the economy. Furthermore, there is a long-term correlation between stock prices and interest rates. The Finance Minister's expected funds for investment and spending influence the country's fiscal deficit. This affects the money supply, the economy, and interest rates in India.

In general, high interest rates raise the capital cost of the sector, reducing profitability and thereby lowering stock prices. The scenario is reversed when interest rates are low.

As per a study, long-term interest rates are said to be negative for stock markets, while short-term interest rates impact stocks positively.

Long-term interest rates have a 10-year maturity period in government bonds. The rates are calculated based on the lender's price, the borrower's risk, and the contraction in capital value. A lower long-term interest rate encourages more investments, whereas higher rates discourage them. These investments are critical for economic development. Higher bond rates exacerbate stock market volatility.

During the development of the Union Budget, the Finance Minister will review income and spending estimates. The government then consults with its key economic experts to determine the optimal level of borrowing to satisfy the deficit objective. The government's foreign borrowings include bilateral and multilateral aid. Notably, a portion of the income shortfall remains unfilled, to be supplied by the issuance of ad hoc treasury notes.

External borrowings are determined by the government's budget deficit objective for the upcoming fiscal year. The fiscal measures outlined in the Union Budget provide an outline of the average man's expenses.

For example, a rise in direct taxes will result in a loss in disposable income, thus reducing demand for other items. As demand falls, so does output, affecting economic development. Similarly, an increase in indirect taxes would result in a loss in demand because the rates are passed on to consumers through higher costs. With rising costs and falling demand, the company's profit margins decrease, further affecting stock prices.

Conclusion

The Union Budget of India wields a substantial influence on the economy, interest rates, and the stock market. Investors keenly await the budget for insights into fiscal policies, which can impact sectors and stock prices. The relationship between government spending, taxation, and market dynamics underscores the interconnectedness of economic policies and market performance.