What is Union Budget?

The last working day of February has a great significance for every Indian. Not because on that day we celebrate any national festival but because the Union Budget is presented on that day! The budget is a grand event for every Indian as it touches everyones life in one-way or the other. However, nowhere else in the world is Budget--the presentation of a simple document detailing the government's receipts and payments--rendered so much importance. Despite the budget being only a detailed plan for a measured period, setting goals and outlining resources to meet them, people from all walks of life are glued to their television sets to watch if the budget would bring any goodies for them or if the finance ministers Pandora would have some bad news for them. The budget also gives information on tax revenues and other receipts besides a general break-up of expenditure and allocation of plan outlays by sectors as well as by various ministries. The dictionary meaning of budget is a systematic plan for the expenditure of a usually fixed resource during a given period. Except for a few exceptions like elections, the finance minister presents the annual Union Budget in the Parliament on the last working day of February. The budget has to be passed by the Lok Sabha before it can come into effect from April 01. The Union Budget is a yearly ritual of the Indian government where its a comprehensive display of the governments finances. The finance minister puts forward a report that contains the Government of Indias revenue and expenditure for the entire fiscal year (period starting from the first day of April to the last day of March). The Union Budget is preceded by an Economic Survey, which outlines the broad direction of the budget and the economic performance of the country--in short the Economic Survey helps to know about the health of the economy while the budget is the medicine to improve the health and wellbeing of the economy.

Budgets effect on the stock market

Does the budget hold any importance for the stock market? It certainly does! The budget affects the economy as a whole, the policy rates and the stock markets. It determines how the finance minister spends and invests money and how the same affects the fiscal deficit. The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. Consequently, high interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices and vise versa. On the other side, the fiscal measures undertaken by the government affect public expenditure. For example, an increase in the direct taxes would decrease the disposable income, thus reducing the demand for goods. This decrease in demand will translate into a decrease in production, thereby affecting the economic growth. Similarly, an increase in the indirect taxes would also decrease the demand. This is because indirect taxes are often partially or completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce the profit margins of companies, thus slowing down the production and growth. In short it does affect the stock markets but indirectly. This is proved by the market's reaction to the budget in the recent past. When we consider the period since 1993, out of 17 occasions, the market has fallen on the budget day for 11 times, clearly indicating that the budget is a closely monitored affair by the markets. This is not because the finance minister announces the budget from the BSE building or anything of that sort but because the capital market players wait for the Union Budget with a lot of expectations. Every company, industry, investor or individual would expect the budget to bring goodies and expectations (as per the human tendencies) are always going to be infinite but the means to satisfy them will always be limited. As a result, most of the times, a large part of these expectations goes unfulfilled and consequently the market falls. Things were no different last time in July 2009 when Pranab Mukherjee from the newly elected UPA government announced the interim budget. With stable government at the centre, huge expectations had been built up from that budget. But the budget, which was for the "aam admi", had not appealed to the stock market and on that very day the Sensex had fallen by 5.83%, that is the steepest budget day fall in the last 17 years.

Having said that, during P Chidambaram's "Dream Budget" of 1997--the budget that laid down the roadmap for economic reforms in India--the markets had surged by a huge 6.53% on the budget day, which was the highest rise of the previous 17 years. However, one has to recognise that the impact of the budget is short-lived and in the long run, the market always returns to its mean. Having said that, such irrational behaviour and anomalies also bring in good opportunities for the long-term investors!