2014 Budget Simplified

There is anticipation in the air. The Sensex and Nifty have scaled new peaks. All eyes are now on the budget to be presented in the Parliament by Mr. Arun Jaitley, India’s new finance minister. The future direction of the stock market is significantly dependent on the budget.

Here are the pointers that explain stock market expectations of Budget 2014-15

Also read: Union Budget

• Fiscal deficit: This occurs when the government’s expenditure exceeds its earnings. A high fiscal deficit leads to a higher borrowing by the government. When that happens, it competes with businesses for money in the market. This keeps interest rates high and stokes inflation. A key thing to look for in Budget 2014 would be an announcement relating to the Fiscal Responsibility and Budget Management Act. Markets will look for specific targets to bring down the fiscal deficit over the next few years. A lower fiscal deficit in FY15 will ensure that the government borrowing does not increase sharply. RBI would be able to, then, lower key borrowing rates. Stock markets thrive when interest rates fall.

• Productive spending: Subsidies on fuel, fertiliser and food form a large chunk of the government’s spending. To control the fiscal deficit, the government may have to cut this expenditure. However, it needs to continue with productive spending on aspects like healthcare, education and physical infrastructure. The capital expenditure on infrastructure in Budget 2014-15 would be watched closely by the stock market. A lot of businesses rely on the spending by the government.

• Boost revenue: Fiscal deficit can be controlled through an increase in revenue too. The stock market expects the new government to implement the goods and services tax (GST), which could led to a rise in revenue. This can also help the economy grow faster than the current 5%, over the long-term. The stock market would look at practical timelines for implementation of goods and services tax. They would also want the government to implement the Direct Tax Code that simplifies the tax structure for individuals and companies.

• Disinvestment: The National Democratic Alliance pushed for disinvestment aggressively between 1999 and 2004. They had a cabinet minister in Arun Shourie to steer the initiative then. However, in this regime, there is no disinvestment minister. The stock market expects this government to do much better on disinvestment than the previous United Progressive Alliance regime. In Gujarat, the government in the past has empowered public sector companies and turned loss-making ones around. The stock market expects greater autonomy to public sector companies. In the Budget, investors would look at planned selloff of stakes in public sector companies and the amount the government expects to receive. In a nutshell, investors are looking forward to steps to rein in the government spending thereby controlling the fiscal deficit. At the same time, they would look for a boost in revenue by implementing GST and disinvestment.

Also read: Highlights of Union Budget 2019