The announcements of Union Budget have direct implications on the stock market as the government's policies and financial plans decide the upcoming trends in different sectors.
For instance, with the execution of several infrastructure projects being delayed, the government's focus has been on this sector. In the upcoming budget, the Centre is expected to invest a significant amount in infrastructure, especially with elections just around the corner. So, we can anticipate that going ahead, there could be a boom in the infrastructure space.
Since the government has also talked about empowering young people through digital strategies, the market is looking to identify where it will spend its money in this regard.
Fiscal deficit - an important benchmark
The revenue that the government collects will typically indicate if there is sufficient money to cover all budgeted expenditures. When the government's expenditure is higher than total income, the situation is called a fiscal deficit. Hence, a benchmark is set for fiscal deficit.
In essence, the fiscal deficit indicates whether or not the government must print money or borrow money from the market. There is inflation whenever the government produces money or borrows from the market. Depending on the state of the economy, this inflation causes the Reserve Bank of India (RBI) to tighten up the policy, which in turn has massive impact on the stock market.
If the activity in the economy is sluggish and the government borrows money, the rate may be lower. However, if the economy is booming and the government raises fund, then the money is going to be tight because there's competition from the government and private enterprises for the money, leading to higher interest rates.
This is an important aspect of the budget that the market looks at.
Excise duties are dynamic in nature. For instance, the windfall profits tax – a special additional excise duty aimed at absorbing the super-profits of domestic oil producers – was recently cut when crude oil prices declined. They were once more put into practice when the price of crude oil increased slightly. The windfall profit tax has direct impact on oil companies and hence, triggers stock movements.
The government makes many sector-focused announcements during the budget session while also standardising, rationalising, and making dynamic decisions.
Hence, as the government's policies, spending patterns, schemes and other financial plans impact several sectors, investors watch the budget closely to strategize the next plan of action.