What does the stock market expect from Union Budget 2024?

With July upon us, the Indian stock market will be increasingly focused on the Union budget that’s due around the end of the month. While the budget date has not been announced yet, the market is already excited as it could be an important trigger for stock prices. 

The budget in February was an interim one because the general elections were imminent, and the upcoming budget will be a regular one with big policy decisions and announcements.

With the market at all-time highs and stocks generally expensive, regular quarterly earnings growth won’t be enough to pull it significantly higher, and it will need regular triggers that keep investor sentiment positive.

These could come in the form of specific policy decisions on infrastructure, taxes or the capital markets. Sector-specific decisions will have an impact on those stocks as well.

The budget will also lay out the government’s spending plans. This will be important for the fiscal deficit, which in turn will affect inflation, the bond market and the rupee.

What does the stock market want from the budget?

#1 Control over the fiscal deficit

Here, it’s important to understand the link between the deficit, inflation and interest rates.

The stock market doesn’t like high interest rates. This is because elevated rates incentivise people to move their money to bonds and fixed deposits. High interest rates also increase the cost of borrowing for businesses and people. 

The main reason for high interest rates is high inflation, but the RBI is unlikely to cut interest rates any time soon as inflation has remained persistently high. 

The market nonetheless wants inflation to be brought under control, and one of the best ways of achieving this is for the government to keep its spending in check. It’s not the spending itself that is the problem here, it’s the difference between spending and the revenue – i.e. the fiscal deficit.

The fiscal deficit target for FY25 is 5.1% of GDP. The market will react if the target is either lowered or increased. An increase would be received negatively by the market while a decrease would be celebrated.

#2 Long-term policy decisions

Indian governments have long been accused of lacking long-term vision and budgets have been used as a tool to push policies that benefit voters in the present, without an eye on the future.

While there’s nothing wrong with such an approach per se, long-term planning has not been a strong point of previous budgets. In her address to Parliament, President of India Droupadi Murmu said the upcoming budget would be “futuristic”.

She said, “My Government will present its first budget in the forthcoming session. This budget will be an effective document of the Government’s far-reaching policies and futuristic vision. 

“Along with major economic and social decisions, many historic steps will also be seen in this budget. The pace of reforms will be further accelerated in tune with the aspirations of people of India for rapid development.”

The market is eagerly awaiting any big announcement related to the future of the Indian economy, with many expecting the government to take at least one historic policy decision.

#3 Capital expenditure boost

The slowing of public capital expenditure was a point of concern after the interim budget, and Dalal Street expects to see a significant boost to capex in the full budget. 

This is important because the government’s regular revenue expenditure, while crucial for running the country, doesn’t boost the economy. Only the capital expenditure can do that, especially with regards to big infrastructure projects.

The stock prices of all infrastructure companies will thus hinge on this number.

#4 Sector-specific decisions

These are mainstays of every budget. Various industry groups meet finance ministry officials to present their proposals to the government before the budget. Only some of these are actually included in the budget as most can be dealt with separately.

However, specific-policies are seen as a sign of the government’s priorities and can be a positive trigger for stocks in those sectors.

The following sectors have positive expectations this time around: infrastructure, real estate, MSMEs, defence, metro rails and Vande Bharat trains, textiles, travel and tourism, research and development.

Also, spending on agriculture, healthcare, education and social welfare schemes will likely get a big boost because of the coalition government.

What this means for investors

Investors should not base specific investment decisions on events such as the budget. History has proven that the market quickly forgets about the budget.

However, some decisions will be important as they could have a material impact on specific stocks and sectors. Investors should keep an eye out for such decisions and assess its impact on the stocks in their portfolios.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com