It has been observed by looking at the historic data that the stock market dropped almost on average by 1% in the month before the budget, according to a report by Bloomberg. But, why is the budget so important for investors overall? Why does the market fluctuate when the budget date is close?
Let’s understand the answers to all these questions in three primary reasons for investor’s curiosity in the budget:
Indirect and direct tax rates
There are two types of taxes the government from which earns its revenue, direct tax and indirect tax. Both of them may affect your investment decisions in different ways. If an individual gets the tax benefit of investing in equity-linked schemes, you might be ready to take more risk than before when tax deduction is available.
Similarly, in the case of indirect as well, it may affect your decision of investing in a particular industry. For example, if the budget increases the GST on raw materials required in the construction of real estate like cement, the real estate company’s profit margin will decline and investment in the same will become slightly unattractive. You might not choose real estate to invest in due to fear of low returns.
It is the main reason why the stock market falls before a month of the budget. Everyone wants to be available for the money to invest in the sectors with maximum tax benefits.
Industry-related laws
On the basis of laws only, industries are operating smoothly. When any rule changes, there might be two scenarios, favourable and unfavourable to the industry. When the government in its budget introduces a regulation in favour of a particular industry, investors trust the same industry more and start investing more.
For example, there is various documentation required for incorporating a company to start their operations, due to which businesses show less interest in the sector which might be harmful to the economy. The government may announce fewer regulatory measures to promote capital expenditure in the same industry.
The greatest example of the same is introducing FDI from automatic routes in a few of the industries in India, like ports and shipping, railways infrastructure, and renewable energy.
Government support via subsidies and grants
Sometimes, the government looks forward to supporting some industries in the country to promote and protect their interests. Such support may be in the form of tax assistance, like tax incentives given in SEZ (special economic zones), in the form of regulatory assistance as per discussed above, or maybe in terms of financial assistance as well.
In the budget, the government may announce some schemes to give interest-free or low-interest loans to support a particular sector in the economy.
The stock price of the companies belonging to the same sector will increase because of an increase in demand after the budget. The most recent example is PLI schemes. The various sectors like pharma, electronics, food processing, and white goods industries performed really well. Allied sectors like transportation performed well too.
This is why investors wait for the budget, and exit from the market where there is an expectation of no actions or negative actions on the part of the government. The stock market and industries' performance go hand in hand, also they get affected by macro and microeconomic aspects. You need to keep your eye on the government’s actions to analyse its effect to make the best out of your investment.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
