Historical Impact of Budgets on Stock Markets
Introduction
The Modi 3.0 government is set to table its first Union Budget on 23rd July. Hailed as one of the major financial events, all eyes will be on Finance Minister Nirmala Sitharaman, who will present her seventh consecutive Union Budget , a new record.
The Union Budget is keenly watched by stock market participants and investors. The Budget's effect on the share market depends on the announcements made by the Finance Minister. This blog aims to decode the historical impact of Budget(s) on stock markets.
Significance of the Union Budget
The Union Budget holds significance for several reasons. Some of them are as follows:
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Economic planning: The Union Budget outlines the government's financial planning for the year. It details revenue and expenditure and aids in setting economic priorities and allocating resources to various sectors.
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Policy implementation: The Budget introduces several new policies and reforms driving economic growth. It showcases the government's approach to taxation, subsidies, and public spending.
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Fiscal management: The Union Budget helps manage fiscal deficit and public debt. It provides a framework for balancing income and expenditure, which is essential for sustainable economic development.
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Regulatory changes: The Union Budget often introduces changes to regulations impacting various sectors of the economy. These changes often drive structural reforms and modernisation.
Historical trends and patterns
The scope and nature of the Budget change with each passing year. During Budget periods, investor activities tend to increase. Around this time, everybody suddenly seems to take an active interest in markets, leading to overall higher volatility.
Analysis of data over the past 30 years shows that the Sensex has shown positive returns around the Budget only in 2006 and 2017 . Since 2000, Budget days have seen significant market fluctuations. Returns peaked at 4.1% in 2021 and dipped to -5.4% in 2009 . This underscores the market's volatility during this event.
Case studies of key budgets
Over the years, several Budgets have gone on to become landmarks in the history of India. Some of them are:
| Budget for Year | Budget presented by | What made it stand out? |
|---|---|---|
1957-58 | T T Krishnamachari | Path-breaking tax reforms with the highlight being wealth tax. |
1991-92 | Dr. Manmohan Singh | Ushered a series of reforms that paved the way for India's economic liberalisation. |
1997-98 | P Chidambaram | Hailed as a dream budget, it reduced personal and corporate tax along with doing away with surcharges and slashed royalty rates. |
2000-01 | Yashwant Sinha | Revolutionised the Indian IT sector with a proposal for reduction in customs duty on 21 items. |
2017-18 | Arun Jaitley | Merged the Railway Budget with the common Budget, which has been the norm since then. |
Sectoral impact analysis
Market reaction: Pre and Post Budget
The table below shows the performance of the Sensex and Nifty one month before and one month after each Budget following the formation of the new government:
| Year | Index | One month before return | One month after return |
|---|---|---|---|
2004-2005 | Sensex | 4.70% | - 4.21% |
Nifty | 4.89% | - 4.52% | |
2009-2010 | Sensex | 15.04% | 1.33% |
Nifty | 15.60% | 1.89% | |
2014-15 | Sensex | 5.01% | 2.81% |
Nifty | 5.06% | 3.09% | |
2019-20 | Sensex | 1.18% | - 4.86% |
Nifty | 1.31% | -5.43% |
Long-term effects on the stock market
The long-term effect of the Budget on stock markets can be profound. It can influence various aspects of the economy and investor sentiment over time. For example:
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A well-structured Budget can promote economic growth and boost productivity, leading to higher corporate earnings and rising stock prices.
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Budgets emphasing on fiscal discipline can boost investor's confidence by reducing risk of inflation and interest rate hikes.
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Certain sectors can benefit from targeted budget allocations, which can drive up the stock prices of companies operating within that sector.
Lessons learned for investors
While markets tend to be volatile in the days leading up to the Budget and can experience some blips during Budget days and a few days after it, you must not panic and avoid knee-jerk reactions as an investor. Take a long-term view, especially if you have invested in equities.
Remember how markets tanked following the declaration of Lok Sabha results, only to scale new highs in the next few days? If you panic and exit, you run the risk of converting your notional losses into actual ones.
Summing it up
Budgets and stock markets are interconnected. The budget impact on the share market has also been negative and positive. As an investor, you must be calm and get your asset allocation right for a smooth ride.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
