Budget Effect on Share/Stock Market

You must know that when the Budget is prepared, it leaves a certain impact on the interest rate, stock market, and economy. The fiscal deficit is influenced by how the finance minister allocates and invests funds. This deficit, along with its financing methods, plays a role in shaping the money supply and interest rates within the economy. Elevated interest rates result in a higher cost of capital for industries. This leads to decreased profits and, subsequently, lower stock prices.

Government-initiated fiscal measures have a direct budget impact on share market and public expenditure. For example, an uptick in direct taxes results in reduced disposable income, leading to a decline in the demand for goods. This drop in demand subsequently leads to a decrease in production, affecting overall economic growth.

Likewise, an increase in indirect taxes also contributes to reduced demand. Indirect taxes often get passed on, at least in part, to consumers through higher prices. Elevated prices prompt a decline in demand, diminishing the profit margins of companies thereby slowing down production and economic growth.

Non-plan expenditures, such as subsidies and defense spending, further influence the economy. These expenditures utilize limited government resources for non-productive purposes, affecting the overall economic landscape.

Learn more about the impact of union budget on indian stock market.

What is the Union Budget of India?

According to Article 112 of the Indian Constitution, the Union Budget 2024, which includes a list of financial recommendations and estimates, is commonly referred to as the “Annual Financial Statement.” As implied by the name, the nation’s Budget, which includes projections of government spending and income, is created for each fiscal year. 

Considered the financial road plan, the Budget is a drawn-out process involving months of meetings between federal and state agencies, departments, and ministries. When creating the budgeted estimations and standards for the upcoming year, the performance of the previous year’s Budget is taken into consideration.

The Indian government has unveiled 73 yearly budgets, 14 interim budgets, and 4 special budgets since gaining independence in 1947. A “vote of account” or interim Budget is often announced during an election year. The whole set of accounts, including revenue and expenditure, are included in the interim Budget. Nonetheless, following a successful election, the governing party releases the whole Budget later on, and modifications to the proposals made in the interim Budget may occur in the final version. The estimated accounts for the upcoming two to four months make up the interim Budget.

Who prepares the Budget?

Each year, the crucial task of formulating a foundational budget for the country is undertaken by the Budget division within the Department of Economic Affairs in the Ministry of Finance. However, this process is not conducted in isolation, and numerous government ministries actively participate in it.

Their responsibility is to meticulously draft financial estimates outlining the government’s anticipated spending and expenses for the upcoming year. Additionally, revised estimates from the preceding financial year are factored into project significant data.

The entities involved in crafting the Union Budget 2024 include:

• Union Ministries
• Financial ministry departments such as the Department of Expenditure, Department of Economic Affairs, Department of Investment and Public Asset Management (DIPAM), Department of Revenue, and Department of Financial Services. 
• Other contributors encompass various government departments, states and union territories, autonomous bodies, the tax department, and additional forces. 

These departments engage in extensive consultations to collaboratively formulate the final Budget.

How does the budget impact stock markets?

India’s Union Budget has a significant impact of union budget on indian stock market, interest rates, and economy of the nation. Generally speaking, the state of the economy is reflected in the performance of the stock market. Moreover, interest rates and stock prices have a historical link. The expected amount of money the finance minister announces for spending and investing affects the national budget deficit. This affects India’s economy, money supply, and interest rates.

Impact on interest rates 

High-interest rates often cause an increase in the industry’s capital costs, which reduces profitability and, ultimately, drives down stock prices. When interest rates are low, the situation is the opposite.

According to a study, short-term interest rates have a beneficial effect on equities, whereas long-term interest rates have a negative influence on stock markets.

In government bonds, the maturity period for long-term interest rates is ten years. Rates are determined by factoring in the cost imposed by the lender, borrower risk, and decline in capital value. On the other hand, higher rates deter additional investment, while lower long-term interest rates encourage it. These expenditures are essential for economic growth. Increased bond yields cause stock markets to become even more uneasy.

Analysing the revenue and expenditure

In the course of preparing the Union Budget 2024, the Finance Minister thoroughly examines revenue and expenditure estimates. Subsequently, the government, in consultation with chief economic advisors, determines the optimal level of borrowing to meet the deficit target. These borrowings, known as external borrowings, encompass bilateral and multilateral assistance. It’s noteworthy that a portion of the revenue gap remains unfilled, to be addressed through the issuance of ad hoc treasury bills.

The extent of external borrowings is contingent upon the fiscal deficit target that the government aims to achieve in the upcoming financial year.

The fiscal measures outlined in the Union budget provide a framework for the expenditure affecting the common man. For instance, an increase in direct taxes leads to a reduction in disposable income, subsequently dampening the demand for various goods. This decline in demand, in turn, results in decreased production, impacting overall economic growth. 

Similarly, a surge in indirect taxes also triggers reduced demand as the increased rates are passed on to consumers through higher prices. The subsequent rise in prices and decline in demand contract the profit margins of companies, influencing stock prices.

In stock markets, investors anticipate changes in tax structures, particularly in areas such as long-term capital gains tax, short-term capital gains tax, and security transaction tax, among others.

Conclusion

For prospective or current investors, the post- budget impact on share market may appear highly unpredictable. Certain share market expectations are brought about by each financial year; some of these expectations are met, while others are not. Nevertheless, the market is anticipated to withstand the volatility despite the setbacks. Investing in the market may remain a viable means of creating money if you have access to the correct brokerage and coaching.

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