Every year investors closely follow the finance minister's speech on budget day. From subsidies to taxes, there are many ways in which the FM’s decision can have a direct impact on the stock market.
Let’s take a look at 5 ways in which the Union budget impacts the markets.
1.Key Allocations
Oftentimes, the government spends money to boost economic growth by setting it aside for various sectors such as Defence, Infrastructure and Railways. Higher spending can have a positive impact on the market as it boosts consumption and leads to job creation. Fund allocation for any sector is considered good news as it can translate into new business for companies.
2. Subsidies
The government provides subsidies for food and fertilisers under many schemes. This is not only beneficial for the fertiliser companies but can also have a positive impact on rural consumption. Spendings increase which in turn benefit the FMCG and two-wheeler stocks.
3.Taxes
The third factor which can have an impact on the markets is taxes. When the government makes a change in Direct taxes like Income Tax or Indirect taxes like Customs duties, it directly affects the demand.
Increasing taxes boosts the government revenue but it also reduces money in people’s hands which means a possible slow down in consumption. This can, in turn, hurt the earnings of listed companies.
Any change in the Securities Transaction Tax or the Capital Gains Tax levied on trading in the markets can also impact market sentiment.
A reduction or increase in duties impacts the final price of the goods produced and is hence, significant for business.
Therefore, traders track tax announcements very closely.
4. Setting Goals
The government sets growth targets for various parameters like fiscal deficit and GDP in the Union Budget. For the stock market, this functions as an indicator of things to come. For instance, a higher GDP growth target means the government expects higher output that year. Companies take this as a positive indicator because it reflects confidence in the economy and business.
5. Divestment Plan
Investors keenly monitor the disinvestment list of the government. These are companies in which the government wants to sell or reduce its stake. Last year, the focus was on the listing of the state owned life-insurer LIC. Similarly, this year the focus may be on the divestment path for listed companies like BPCL and IDBI Bank.If you like such content and want to learn more about the Union Budget in a simple and easy to understand language, just follow Upstox!
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