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Uday Kotak’s view on Budget 2016

Watch Uday Kotak, as he talks about Budget 2016 and simplifies the budget for you.

Read the video’s transcript in:

English Hindi Marathi Gujarati Tamil

Malayalam Kannada Telugu Punjabi Bengali



How to trade on Budget Day?

On the day of the budget, if you are clued to the stock markets, you can sense butterflies. There are moments of anxiety about things that would unfold.

Trading on the budget day may not be an easy task. Here are a few important things to know about the Budget Day:

  • Ahead of the budget speech: The budget speech typically begins at 11 am on the last day of February. Stock markets begin trading a couple of hours before that. There is limited action in the market as everyone is anxiously waiting for the finance minister to speak. Trading is usually thin and prices move nowhere.

  • First part of the budget: The first part of the finance minister's speech highlights the stance of the government. You may hear words like agriculture, infrastructure, growth, fiscal deficit among other things. Stocks related to agriculture and rural markets typically tend to react immediately. Finance ministers usually speak about boosting rural infrastructure in the initial part of the speech. The market also looks at the fiscal deficit number for the current and new fiscal years. All eyes will be on whether the government manages to meet its deficit target.

  • Second part of the budget: The real market action begins when the finance minister begins to read out tax proposals. The direct and indirect tax proposals have a variable impact on share prices. If taxes go up, the immediate reaction is negative. If taxes are cut, the immediate reaction is positive across sectors.

  • If you are a day trader: It is usually a volatile day. Assume that and get ready for trade. It does not matter whether the budget is good or bad. Share prices are likely to swing up and down. As a day trader, if you are courageous and like betting on volatility, this is your day.

  • Long-term investor: If you are a 'buy and hold' investor, you may want to watch out for negative news in the budget. If the fiscal deficit is higher than estimated, expect foreign institutional investors to sell across the board. As a long-term investor, this could be your chance to pick up some companies with strong fundamentals.


  • The real market action starts during the budget speech, especially during tax proposals.

  • Look out for words like infrastructure, growth, capex, fiscal deficit.

  • Day traders should brace for volatility, while long-term investors could look for buying opportunities.

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Will FIIs bet on India again in 2016?

Foreign investors are one of the biggest players in the Indian stock market. Needless to say it is important that FIIs remain invested in the market. Otherwise, the market could see lots of falls. Already foreign investors have sold a lot in the last few months. This is mainly because of the weak global economy and markets. Moreover, with the slowdown in China, investors around the world are worried. As a result, sentiment has taken a hit.

While the reasons are global, Indian markets have been affected too. This is mainly because of the lower-than-expected corporate performance. That said, the Indian market performance has been much better than many of its peers.

Going forward, a lot depends on the Budget. Let's see if the FIIs could continue to bet on Indian

  • Global factors to dominate: Going ahead, we expect that the global factors will continue to determine foreign investors' activities. However, a lot depends on two other things – improvement in corporate earnings and domestic macroeconomic factors.

  • Fiscal and monetary initiatives: The Indian economy needs assistance from the government to stimulate growth. This applies to the corporates too. This is why the Budget will play a major role in determining the foreign investment flows. However, all of it depends on the Budget announcements.

  • Fiscal prudence: Most important for foreign investors would be the government's fiscal deficit target. The Indian government had run over 5% fiscal deficit for years. Now, it has been narrowed to 3.9% of the GDP. It is more than important today to continue fiscal consolidation. Even a small slip could cause the foreign investors to lose trust in the government's focus.

  • Sustained focus on growth: The need of the hour is investment in the economy. Investors would closely monitor the Budget for its growth-related policy. Infrastructure needs investments from the government at a time when private investment is yet to pick up.

  • Control subsidies: The government has to cut down its expenditure and increase revenues to cut down fiscal deficit. This leaves it with little room for productive spending unless it controls its subsidy expenditure. Already, India deregulated the petrol and diesel prices, allowing it to save crores on subsidy payments. It is vital for this subsidy control to continue further.

  • Tax reforms: Goods and Service Tax is long pending. It is the most important tax reform in the pipeline. The tax reform could help add nearly 2% to the Gross Domestic Product, a measure of the economy. Apart from that, the government needs to look at other tax measures too to stimulate growth.

  • Reform measures: GST is not the only important legislation pending. Other reform measures like the Bankruptcy Act or reform of PSU Banking sector regulations are much needed. These will increase the FII's confidence on India.


  • Global factors caused FII selling, but Budget could change that.

  • FIIs will closely eye government's fiscal deficit targets and expenditure plan.

  • Reform measures like Goods & Services Tax (GST), Bankruptcy Act will increase FII confidence.

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Why Union Budget is important for the Stock Market?

The big Budget Day is around the corner. It is time to brace for any changes in stock market sentiment. A good budget can lead to a bull-run in the market. Similarly, one wrong announcement and the market can shed points.

But before you figure out exactly how the stock market may react, you need to understand how the budget impacts stock markets. Here’s a look:

  • Government finances: The Union Budget is a simple financial statement of the government’s income and expenditure. The government announces measures to boost revenues. It will also give a detailed picture of the expenditure planned. The stock market cares about both revenue and spending. Expenditure done right can stimulate the economy. Contrarily, higher expenditure increases borrowing. This can impact the interest rates, corporate profits and inflation as well.

  • Fiscal deficit: If government expenditure exceeds its income, it has to borrow money from the market. This is called fiscal deficit. A prolonged and high fiscal deficit has a negative impact on the overall economy including inflation and interest rates. All of this affects corporate profits. And anything that affects companies also has an impact on the stock market.

  • Direction of the economy: As part of the budget speech, the finance minister also lays down the government’s forecast for the economy as well as the challenges expected. To tackle these, he announces key action points on the budget day. Stocks begin to buzz almost after the action points are announced.

  • Tax measures: The most important aspect of the budget is the tax policy. In every budget, the finance minister tweaks the tax rules that guide companies as well as individuals. These can often be the difference between profits and loss for a company. Even on an individual level, tax measures can affect savings and investments. All this affects the stock markets on various levels.


  • Budget talks about government’s income and expenditure plan for the new fiscal.

  • Expenditure plan can boost economy or widen fiscal deficit, which eventually affects companies.

  • Budget also unveils the tax rule that can reduce or increase tax-cost for companies, individuals.

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What are budget-sensitive sectors?

The market closely follows the Budget announcements. These affect many sectors directly – either positively or negatively. Depending on the announcement, the stock markets react. Certain sector stocks move more than others. These are called Budget-sensitive sectors.

Here are the sectors that are generally affected by a budget:

  • Infrastructure: The infrastructure sector is an important focus area for any budget. Lack of modern infrastructure—roads, energy, railways, bridges, power and ports—has been one of the biggest hindrances to India’s economic growth. The sector is key to reviving growth as several industries are dependent on it. The government spending on rural and urban infrastructure leads to creation of jobs and higher investments in the country.

  • Power: The power sector is one of the most vital industries and the backbone of the nation’s infrastructure. It fulfills the energy requirements of other industries and the common man. Therefore, past governments have often announced tax holidays/waivers for power companies to encourage investments in the power sector. Any reduction in customs/excise duty on power equipments also affects the sector. The gain from reduced tax rates would be passed on to the final consumer as lower power bills. The NDA government has emphasized on renewable, ‘clean’ energy in its past budgets. Therefore, incentives on solar power projects and wind energy too influence the sector.

  • Real estate: Successive governments have laid special emphasis on affordable rural and urban housing through numerous schemes and incentives. Initiatives like Indira Awas Yojana and Smart Cities are a part of this. The finance minister allocates a separate sum for low-cost housing and slum development in cities. Plus, any tax-savings related to home loans also affect Realty sector stocks. These can encourage buyers.

  • Automobiles: The budget plays an important role for the automobile sector. The industry looks forward to specific sops and concessions. For example, lower excise duty on cars manufactured in India will translate into price decrease in passenger vehicles for the final customer. A hike in customs duty would affect foreign players manufacturing high-end cars like Volvo and Mercedes.

  • Liquor/cigarettes: To discourage smokers and tobacco consumers, the budget generally proposes steep hikes in cigarettes and tobacco products. For example, in 2015 budget, Arun Jaitley announced a 25% excise duty hike for cigarettes of length not exceeding 65 mm and 15% increases for cigarettes of other lengths.” A hike in service tax rates would make alcohol more expensive. These ‘sin goods’ are often a target of excite duty hikes to increase government tax revenue.

  • Oil and gas: Subsidies on petroleum/diesel form a big chunk of government expenditure. The global crude price crash has provided a breather to the government to spend the additional; savings on infrastructure and social security programmes.


  • Stock markets react to Budget announcements.

  • Stocks of affected sectors move more than others.

  • Budget-sensitive sectors are Infrastructure, Power, Automobiles, Banks, Real Estate

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Ailing sectors that may need attention

2015 was a mixed bag for the Indian economy. While some sectors performed outstandingly well, others suffered. Many ailing sectors need special attention in this year’s budget. Failing which, rescuing them could become nearly impossible. Here are some sectors that need consideration:

  • Agriculture: Indian agriculture has faced four droughts in the last six years. This has broken the sector’s back and its share in the Indian GDP has fallen from around 25% in 2000 to 17% in 2015. Although, reduced dependence on agriculture is desirable in a developing economy, 40% of our population is still dependent on agriculture for its survival. India spends billions of dollars annually on foodgrain imports, whereas, it has the potential of becoming completely self-sufficient. If the Government can deliver a budget that can pull agriculture out of its misery in the medium-term, the country could save billions of dollars on imports and keep the stubborn inflation under check. There are some initiatives that the Government is mulling over for the agricultural sector in this year’s budget. These include raising investments in farming, increasing the role of technology to improve farm productivity, and giving a boost to the micro-irrigation infrastructure-lending status to facilitate cheap borrowing.

  • Infrastructure: High-quality roads, highways, power supply, ports, low-cost housing, and high-speed internet infrastructure are all critical for a country that has high growth aspirations. Budget 2015 saw the Finance Minister realize this need and allocate a record sum of Rs. 70,000 crore for infrastructure development in these areas. Indications are that Budget 2016 will also be as big on infrastructure as its predecessor. There are hopes that new projects will be announced in this space and new funding schemes will be presented. This is especially important after the failure of the infra-bond. It is ironical that despite presenting a resourceful budget last year, the Government was not able to execute it as per expectations. Let us hope that this aspect changes, this time around.

  • Banking: Delayed loan repayments (called non-performing assets or NPAs) and high loan defaults nearly killed some Public Sector (PSU) Banks over the last two years. To prevent their collapse, the Government pumped Rs. 70,000 crore into them. Despite these measures, the health of PSU Banks isn’t improving. Their books continue to be highly contaminated by NPAs and their borrowing activity is still lethargic. Since most Indians choose to bank with PSU Banks, the failure of one bank would mean an acute loss of depositors’ money. To avoid this eventuality, the Finance Ministry will look to improve the health of the Public Sector Banks in this budget on a priority basis. One of the suggestions that the Reserve Bank of India (RBI) has made to the government is to increase the tax-free deposit threshold for five-year Fixed Deposits with Public Sector Banks. This will attract people to deposit more money with banks, and strengthen the banks’ capital buffers.


  • Drought-laden agriculture needs desperate help like boosting micro-irrigation.

  • Infrastructure, a must for economic growth, needs financial help.

  • High bad loans have caused PSU Banks much trouble. They need capital infusion.

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What Union Budget May Have in Store for Make in India?

‘Make in India’ has been Prime Minister Modi’s flagship campaign ever since his election campaign days in 2014. Considering this, it is widely expected that the upcoming Budget may have announcements supporting to the campaign. Here’s a quick look at what this year’s budget may have in store for Make in India.

  • Tax Credit System: The government is planning to introduce a 100% tax credit regime for all inputs in the upcoming budget. This allows manufacturing companies to subtract a certain amount from their tax payments. This amount is based on the ‘inputs’ (or supplies) they purchased during the period. The current tax credit regime offers credits on a limited number of inputs. Moreover, it is the assessor who decides which inputs qualify for tax credits. This leads to long and expensive legal disputes and a high tax burden for manufacturers. The new tax credit system will leave little to the assessor’s discretion. This, in turn, will reduce the instances of tax disputes. The system is also expected to pave the way for Goods and Service Tax (GST) Bill to come in.

  • Tax Incentives for Focused Sectors: The government has received suggestions for introducing a fleet of tax incentives for leather, gems and jewellery manufacturers in the upcoming budget. These sectors were identified among the key focus areas for the Make in India campaign. The government is hoping to increase leather exports to $15 billion by 2020. To achieve this target, the leather industry needs to upgrade its technology, enhance its product quality and increase its level of output. Therefore, the government is considering eliminating Customs Duty on imported leather machinery and cutting Excise Duty on leather goods of up to Rs. 2000. For gems and jewellery, the Finance Ministry received proposals from the industry for increasing Customs Duty to 15% from 10%, and completely eliminating Excise Duty on imitation jewellery. This could boost the India’s imitation jewellery exports that are in high demand in USA and Europe.

  • Make in India in Defence: India is dependent on external suppliers for 65% of its military requirements. However, the government is intent on developing the domestic defence industry by sourcing as much as it can from within the country. Last year, over 80% of the Army’s procurement contracts were sourced locally, and 55% of its modernization budget was spent on Indian companies. Efforts are expected to be taken under the Make in India campaign in this budget to continue patronising the Indian defence goods manufacturing industry. Key resolutions may come in the field of Defence R&D, in continuation with the establishment of the Army Design Bureau, which is to work closely with Defence Research and Development Organisation (DRDO) and Ordinance Factory Board (OFB).

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Reforms That Need To Be Pushed In Budget

Finance Minister Arun Jaitley has dubbed the upcoming budget as a rationalistic and reform-oriented budget that will not be populist. The budget represents an important opportunity for the Modi government to rescue its sagging popularity, after a year of inaction. Here are some of the reforms that the government needs to push this budget.

  • Goods and Services Tax: The government’s inability to get the Goods and Services Tax (GST) Bill cleared last year has been one of its greatest disappointments. The tax aims at bringing all indirect taxes under one umbrella. It was to be passed and implemented by April 1, 2016. However, the opposition majority in the Rajya Sabha didn’t let the bill get clearance. GST is critical to rationalize taxation and for the free movement of goods over inter-state borders. Experts suggest it could help add nearly 2% to the GDP. There are massive expectations from the government to push the bill through in the budget session.

  • Agricultural Reforms: Agriculture was the backbone of India’s economy for a long time. The four droughts in the last six years, have laid waste to the country’s agricultural prosperity. This reeling sector, which still supports a vast section of our population, is in desperate need for reforms. The government on its part has planned a host of agri-reforms that would reduce the farmers’ dependence on rains and re-invigorate the rural economy. One of the plans is to set up a dedicated fund within the National Bank for Agriculture and Rural Development (NABARD) to finance rural irrigation projects. The fund will also introduce innovative credit products that could improve India’s rural credit off-take. It will give farmers an alternative to unorganized sources of borrowing that charge high interest and, in many cases, are the driving force behind farmer suicides. Among other key initiatives is the unveiling of an e-platform that will facilitate trading and healthcare of farm animals and the breeding of high-yielding livestock. Additionally, the budget could introduce a groundbreaking resolution that will recognize millions of tenant farmers as cultivators of their land.

  • Banking Sector Reforms: State-run banks have had a torrid time over the last many years due to bad loans. The government’s simplistic approach of pumping money into banks every time they struggle is no longer viable. It is clear that PSU Banks can overcome their misery only by an infusion of the professionalism, accountability, and transparency of private banks. The Confederation of Indian Industry (CII) proposed that the government create a National Asset Management Company (NAMCO) to take poor loans off the banks’ balance sheets and help PSU banks get back on their feet. This may just be a temporary fix. Also, the Finance Minister may outline a plan for selling some of the State’s stake in public banks.


  • GST, which was to be implemented by April 2016, is still pending.

  • Agriculture reforms like financing rural irrigation projects are a must.

  • Banking rules on bad loans, government intrusion need to be revamped.

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Goods and Services Tax: 5 Things To Know

GST has been a buzzword for quite some time now. Touted to be the biggest economic reform since 1991, the Goods and Services Tax (GST) will help widen the tax base, improve tax compliance and lower the freight costs for businesses. With the budget session around the corner, analysts hope that this important legislation will finally see the light of the day. There is tremendous pressure on the government to implement to GST at the earliest.

  • What is GST?
    GST is an indirect tax that will replace all central taxes like excise duty, service tax and central surcharges and state levies such as Value Added Tax (VAT), Octroi and Entry Tax. All taxes will be unified under a single nationwide sales tax – the Goods and Services Tax.

    GST has been in the works for nearly a decade. The idea was first proposed in India during the 2006-2007 budget of the UPA government. However, successive opposition parties (then, the BJP; now, the Congress) have blocked the passing of the legislation. Select state governments of Gujarat and Madhya Pradesh were also opposed to the bill.

  • Why is GST important?
    A unified tax structure like the GST is followed in several developed economies like the EU, Australia and the USA.

    The GST will help cut through the complexity of the Indian tax regime create a coordinated indirect tax system. It will help reduce complying with multiple taxes on the same product or service. GST will help in widening the coverage of tax base and increase revenue collections for the government. India will have a dual GST system where the central and state governments will be empowered to levy the GST on goods and services.

  • Why is GST not implemented yet?
    Conflicting opinions between the government and opposition parties over the years have prevented the passing of the constitutional amendment to roll out GST. Moreover, several state governments like Gujarat, Madhya Pradesh, Tamil Nadu etc. have opposed to the bill fearing loss of revenues. States are worried that they will lose their power to impose taxes on the public.

  • Are any goods exempted from GST?
    The GST will not include goods like alcohol and petroleum products (oil, diesel). These goods are major money-spinners for several states.

  • What economists say?
    The International Monetary Fund (IMF) and the World Bank have constantly pressed the government to make GST a reality. “The GST (Goods and Services Tax) is the single most important tax reform because it is so important for creating one market in India. GST will make it easier to pay tax”, the World Bank said last year.

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Subsidies in India: 5 things to know

Every budget, one of the most common terms heard is 'subsidy'. Read on to find out all you need to know about the Subsidies in India.

  • What are subsidies?
    In plain terms, subsidy is the opposite of the taxes that you pay to the government. It is the money that you receive from the government for running an industry or business. The common man avails subsidies from the government in the form of tax deductions, home loans, student loans etc. Government provides various other subsidies in the form of subsidies on food, fertilizer and LPG.

  • What subsidies can you avail?
    The budget allocates a major chunk of money for food subsidy. Government provides subsidies for farmers in the form of food and fertilizer subsidies. Through the food subsidy, the poor can buy basic food grains at cheap rates. This has increased 'food security'.

    Apart from food and fertilizer subsidies, the government spends crores of rupees for providing fuel like LPG and kerosene at cheap rates. The government recently cancelled all the subsidies on petrol and diesel.

  • Do they hurt the economy?
    In the past many years, the government overshot its budget mainly due to subsidies. This led to a wide fiscal deficit in the past many years. Spending more on subsidies limits the government's capability to spend on productive expenditure like improving infrastructure. Simply doling out money through subsidies without enough productive expenditure causes rise in inflation without any significant growth in the economy. This is because people have the bandwidth to spend. But there is no improvement in other sources of income like jobs. Without a rise in income, the economy cannot grow.

  • What is the government doing about subsidies?
    The government is under pressure to reduce its expenditure and stimulate the economy. As a result, it is reversing the earlier strategy. The government has reduced its subsidy-related expenditure by de-regulation petrol and diesel. After all, global oil prices are low as it is. In addition, the government is also encouraging financially stable families to give up subsidies. It is also reaching out to the poor directly through the Direct Benefits Transfer program to cut down unwanted expenditure. All these are steps in the right direction.

  • Subsidies: 2016-17?
    There is another option in front of the government – to limit the cap on LPG subsidy. In a year, families can only buy limited number of LPG cylinders at subsidized rates. The government can reduce thislimit to save expenditure. Alternatively, it could also look at a price hike, which is unlikely.


  • Subsidies are the money you receive from government to buy necessary goods& services like fuel.

  • You can avail subsidies on food, fertilizer, LPG and Kerosene. Petrol and diesel are not subsidized anymore.

  • Excessive subsidy without productive expenditure can cause inflation and economic slowdown.

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How Budget affects interest rates

There is a deep connection between how your interest rates are set and the year's union budget. Yes, it is the Reserve bank of India (RBI) that determines and regulates the interest rates. But, the government's activities through are a factor.

Let's look at the relationship between the Budget and interest rates:

  • Fiscal deficit: Over the last many years, the government spent more than it earned. It then borrows money to make up for this difference and fund the extra expenditure. This is called fiscal deficit.

  • Government borrowing: It usually borrows this money from the RBI and the market. Now there are two effects on this borrowing. One, the borrowing reduces the liquidity – availability of easy cash – in the market. Secondly, the RBI could opt to print money.

  • Inflation: Traditional economics suggests, limited supply at a time when there is enough demand leads to a rise in prices. This is applicable for money too. If the RBI prints money, that too can be potentially inflationary. This is because there is more money in the hands of people. So, there's more demand, which then fuels inflation.

  • Fiscal consolidation: Inflation is the greatest monster that the RBI has to counter attack. To battle this monster called inflation, the RBI has to keep the interest rates high. However, high interest rates are bad for the economy. So, to keep a tab on this growing inflation, the RBI asks the government to spend less. This is called fiscal consolidation.

  • Curb fiscal deficit: There are two ways in which the government control deficit: spend less or earn more. The government can decrease its subsidies on food, fuel and fertilizer or cut its investment spending. Alternatively, it can increase tax rates.

  • Spend less, spend right: However, decreasing productive spending or increase tax rates can affect the economy at a time when it is already growing slow. The only option is to balance the spending between subsidies and productive expenditure.


  • RBI sets interest rates, but the Budget affects them too.

  • Overspending causes fiscal deficit and higher borrowing.

  • This borrowing drives up prices causing RBI to keep interest rates high.

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How does Budget affect investments?

Everyone wishes that their money works diligently. For this, you invest your money into shares, bonds, real estate and other assets, where the money can grow to reap returns.

The Union Budget for the year has a great impact on your investments. Read on to find out about how it affects investments.

  • Savings and investment rate: Simply keeping money aside is not enough. You have to invest it. Otherwise, inflation will reduce the value of your money. The government wants people to save more as it improves financial security. To do so, the government announces tax incentives like the Section 80C of the Income Tax Act or increase in tax exemptions. This encourages people to save more.

  • Affects investment returns: The Budget not only announces tax incentives, it also tweaks tax rates on your income sources. For those of you who are already investing, these measures can either help improve your returns or increase tax liabilities. This in turn can change investment patterns. For example, the increase in the duration for Long Term Capital Gains Tax on Debt Funds made Fixed Maturity Plans, once a common investment, costlier. On the other hand, the elimination of Long Term Capital Gains Tax on Equity investments made it a tax-efficient instrument.

  • Investment projects: During the union budget, the government announces policies and schemes. Many of these are directed towards development of the economy like infrastructure projects, road building and freight corridors. These represent the government's investment in the economy. This is called as Capital Expenditure. These investments are made in the expectation of future growth.

  • Corporate investments: The government's investment plan – also called productive expenditure – sets the tone for the corporate India too. Usually, companies follow with their own investments in new projects and businesses. Lack of investments was one of the key reasons behind the slowdown in the economy. This is because new projects leads to job creation, rise in income and consumer spending. All these are essential for growth.


  • Budget announces measures like tax incentives to encourage savings, investments.

  • It also tweaks tax rates on income, capital gain which affect investment returns.

  • Budget also announces government's capex plan, which often motivates companies to invest.

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How can budget trigger inflation?

The budget is one of the biggest events in the world of finance. There is a reason for this – the budget sets the tone of the government's fiscal policy for the entire year. These policies can often be inflationary. Here's how the Budget affects inflation:

  • Government overspending: Companies often borrow money to fund a new project or expansion plans. Similarly, governments borrow money too to fund the extra expenditure. However, over the years, the government has spent a lot more than it earned, incurring a large fiscal deficit.

  • Fiscal deficit & borrowing: The government borrows this money either from the RBI or from the market. The RBI has to print money to lend to the government. Borrowing from the market means issuing bonds. However, this sucks money supply from the system. There ends up a liquidity crunch – people don't have cash available easily.

  • Money supply & demand: Printing money causes excess money supply in the system. When people have excess money, they spend and demand rises. However, without productive investments, companies cannot grow their supply at the same pace. This leads to a rise in prices.

  • Fiscal consolidation: Inflation is the greatest monster that the RBI has to counter attack. To battle this monster called inflation, the RBI has to keep the interest rates high. However, high interest rates are bad for the economy. So, to keep a tab on this growing inflation, the RBI asks the government to spend less. This is called fiscal consolidation.

  • Rise in taxes: There are two ways to reduce deficit, one of which is to drive revenues. To do so, the government may increase taxes. Any rise in indirect taxes could be passed onto the customers by increasing the price of goods and services. This could cause inflation too.


  • The government borrows to make up for overspending.

  • To lend to the government the RBI prints money, which is inflationary.

  • Increase in taxes on goods and services can also lead to inflation.

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Tax Sops for Industries: The Good and the Bad

There are many in the industry who want the Finance Minister to announce tax sops in Budget 2016. These tax sops could mean business in key sectors have extra cash. This could help kick-start the slow-moving Indian economy.

Here are the tax sop recommendations made by some key industries and their expected impact on the industry.

  • Start-ups: New-age businesses are mushrooming all across the country and investors are willing to pay top price to grab a slice. Unfortunately, India’s present tax laws are not very encouraging for young companies and those who invest in them. Therefore, start-ups and early-stage investors have a long list of suggested tax sops for the Finance Minister. Prime Minister Modi made a good start in his Start-up India speech in January by announcing Income Tax exemption for companies in their first three years of business. He also announced tax exemptions for those who invest in the new Rs. 10,000 crore ‘fund of funds’ (FoF) for start-ups. Start-ups are now looking at the Finance Minister to take the initiative forward in the upcoming annual budget. Service Tax relief in the first three years of business, tax exemption under Section 56 (2) for angel investors and liberal taxation for employees of young companies are some of the things that will make for a good budget for start-ups.

  • Real Estate: The ailing real estate sector in India is in dire need of assistance. The government previously offered 100% Income Tax exemption to real estate companies that developed affordable housing. In its pre-budget recommendations to the Finance Ministry, the National Real Estate Development Council (NAREDCO) suggested that this law should be reintroduced and residential projects should be given infrastructure status to enjoy tax benefits. If the suggestions are accepted, it may motivate real estate companies to borrow and undertake new, over-optimistic projects. However, this may not be in the best interest of Banks that are already reeling under the impact of real estate defaults. India needs an estimated 2 crore low-cost houses at a time when there is already excess (albeit costly) real estate inventory in the country. A dedicated inventory rebalancing might work better than introducing tax sops in this case.

  • PSU Banks: Delayed loan repayments and loan defaults have left PSU banks in very poor health. They desperately need funds to shore up their reserves and restart aggressive lending. To this end, the RBI suggested the Finance Minister should increase the upper limit for receiving tax benefits on five-year Fixed Deposits (FD) and Public Provident Fund (PPF). The suggested increase from Rs 1.5 lakh to Rs 2.5 lakh could attract people to keep more money with banks for long-term. This may then strengthen the banks’ balance sheets and allow them to lend more to households and companies. More lending means more consumption and investment, which, in turn, produces high economic growth. Thus, increasing the tax exemption limit on deposits may be a good move.


  • Some good tax sops have already been announced for Start-ups.

  • While realty sector asks for infrastructure status, it could put pressure on banks.

  • Increasing FD tax exemption to Rs 2.5 lakh can help fund ailing PSU banks.

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What could Union Budget have in store for Start-ups?

If Prime Minister Modi’s spirited speech in January on start-ups is anything to go by, this year’s budget could be a bonanza for Indian start-ups. India is in the middle of a great start-up boom as investors are lining up to fund young companies and start-up valuations are going through the roof. However, for this start-up boom to continue, much needs to be done on the regulations front. Here are some changes that are high on a first-time entrepreneur’s budget wish list.

  • Tax Reforms: India is among the lowest ranked major economies for tax regulation. The uncertainties of our taxation system have not even spared start-ups. Among the foremost tax reforms that internet start-ups are hoping for is the introduction of a uniform taxation system that GST (Goods and Services Tax) Bill was to bring. This would prevent e-businesses from being taxed differently in different states and help rationalize their warehousing operations. Start-ups also continue to hope for a corporate tax wave-off in the first year of operations, and a service tax break for the first three years. Companies are not profitable in their early years and taxes put additional pressure on their bottom lines. Liberal taxation in the initial years could reduce India’s start-up mortality rate and improve the fundraising prospects of start-ups. Two other key tax reforms for start-ups are special tax incentives for innovative businesses and tax leniency for employees of small companies.

  • Easy Licensing and Clearance Procedures: Starting a new business in India takes more time than in some of the least-known countries around the world. This is because an entrepreneur has to pass through an unpredictable labyrinth of licensing, certification and clearance requirements to start the business. For a while now, young businessmen have been campaigning for single window clearance for starting new businesses. They have also been requesting for the creation of a dedicated state organization to promote start-ups. Now, they have pegged their hopes to this year’s budget.

  • Easier Funding Environment: An inadequate funding environment often discourages angel investors and venture funds from funding Indian start-ups. Among their greatest fears is that companies won’t get listed, making it difficult for them to recover their investments. Nearly a decade into India’s e-commerce boom, Infibeam is the only e-commerce company that is in the process of getting listed. Start-ups hope to see provisions for a greater governmental support for companies planning an IPO, and the creation of an alternative market for investors to exit their investments in start-ups. They are also pitching for clearer and more lenient taxation for start-up investors, as a means to encourage start-up funding.


  • Start-ups could benefit from tax concessions, waivers in initial years.

  • Single window clearance for starting new businesses is another reform needed.

  • Start-ups also need easier funding environment.

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How does Union Budget influence businesses, economic growth?

The NDA government’s second full-year budget for 2016-17 will be presented on February 29. With corporate earnings reeling and the Gross Domestic Product (GDP) growing in a narrow band, expectations are high that the budget will undertake policy level changes to promote growth.

The government could stress on reviving investment growth and demand by focussing on infrastructure and agriculture. The current global economic climate is also unfavourable for India, so India needs to go the extra mile to address crucial problems in the economy.

The budget policies announced influence businesses and economic growth in the following manner:

  • Taxes levied: The government’s fiscal policy pertaining to taxes and proposed expenditure have a direct connection with businesses and common man. If the government tweaks the tax rates, offers to tax relief, it would lower the cost of production for India Inc. For example, in its 2015-16 Budget, the NDA government reduced the corporate tax rate from 30% to 25%. Any increase or decrease in excise duty, customs duty, will have a similar impact.

    Since India’s top 500 companies experienced zero revenue growth in 2015, the CII, the Indian industry body, wants the upcoming budget to stick to the current indirect tax rates as any upward revision may hamper earnings recovery.

  • Interest rates: High interest rates on loans can be a headache for businesses. If government goes for large amount of borrowing to achieve its budgeted expenditure targets, it has the potential to push up interest rates, for both businesses and the common man. This is called Fiscal Deficit, calculated as the difference between total revenue and total expenditure of the government.

  • Inflationary deficit: A continuous large fiscal deficit could have serious consequences on the economy. This is because the government has to borrow more from domestic and foreign sources to meet this high deficit. This, in turn, escalates the government’s liability through interest payments. Constant borrowing leads to a rise in interest rates. The RBI too prints money to lend to the government. This causes inflation in the system.

    Deficit and economic growth: Repaying loans would increase in the government’s unproductive expenditure. This reduces the government’s ability to spend on productive areas such as infrastructure, education, health, etc. This hurt the country’s growth prospects. It will also hurt the credibility of the government in the world economy.

  • Government spending: The finance minister lays down the expenditure plan in the budget. This includes any spending in crucial sectors such as infrastructure, agriculture, steel etc. This is called as capital expenditure or government investment. This encourages the private sector to invest too. This sparks economic growth. Private investment is also the key to creation of jobs.


  • Budget tweaks taxes levied on income, goods and services.

  • This affects prices, consumer behaviour, investments and eventually corporate profits.

  • Excess spending and borrowing can cause inflation, high interest rates.

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How does Budget affect investments?

Everyone wishes that their money works diligently. For this, you invest your money into shares, bonds, real estate and other assets, where the money can grow to reap returns.

The Union Budget for the year has a great impact on your investments. Read on to find out about how it affects investments.

  • Savings and investment rate: Simply keeping money aside is not enough. You have to invest it. Otherwise, inflation will reduce the value of your money. The government wants people to save more as it improves financial security. To do so, the government announces tax incentives like the Section 80C of the Income Tax Act or increase in tax exemptions. This encourages people to save more.

  • Affects investment returns: The Budget not only announces tax incentives, it also tweaks tax rates on your income sources. For those of you who are already investing, these measures can either help improve your returns or increase tax liabilities. This in turn can change investment patterns. For example, the increase in the duration for Long Term Capital Gains Tax on Debt Funds made Fixed Maturity Plans, once a common investment, costlier. On the other hand, the elimination of Long Term Capital Gains Tax on Equity investments made it a tax-efficient instrument.

  • Investment projects: During the union budget, the government announces policies and schemes. Many of these are directed towards development of the economy like infrastructure projects, road building and freight corridors. These represent the government's investment in the economy. This is called as Capital Expenditure. These investments are made in the expectation of future growth.

  • Corporate investments: The government's investment plan – also called productive expenditure – sets the tone for the corporate India too. Usually, companies follow with their own investments in new projects and businesses. Lack of investments was one of the key reasons behind the slowdown in the economy. This is because new projects leads to job creation, rise in income and consumer spending. All these are essential for growth.


  • Budget announces measures like tax incentives to encourage savings, investments.

  • It also tweaks tax rates on income, capital gain which affect investment returns.

  • Budget also announces government's capex plan, which often motivates companies to invest.

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Why Budget is not just an account statement

The Finance Minister gives details about the government's estimated expenditure and revenues. It is prepared for every financial year (April 1 – March 31). It is quite akin to any company's account statement.

However, the Union Budget is more than a statement of accounts of public finances. It is also an opportunity for the government to review the direction and the pace of India's economy and its own fiscal policy.

The function of a budget goes beyond being merely an account statement. Here's how:

  • Tax policy: The budget speech is followed closely by everyone, mainly for the tax-related announcements. The corporates as well as the common man watch and analyse the budget to understand how it affects them. One man's expenditure is another man's revenue. The tax proposals in the budget could pinch or help the common man's pocket. Either way, it is the most important source of revenue for the government. This in turn can affect the way people spend, save and invest their money. It also has an impact on the prices of goods and services.

  • Economic and Social Development: The budget is a powerful instrument to promote economic development and reduce inequalities in income. Landmark social sector programmes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), Sarva Shiksha Abhiyan, Integrated Child Development Scheme and others have been announced in the past budgets to tackle problems like malnutrition, illiteracy and job creation. The government uses the tax revenues and public borrowings to fund such schemes.

  • Public Accountability: The sheer size of the Indian economy makes the budget important. The government can be held accountable for its management of public finances via the budget. The budget influences the allocation of resources to various sectors of the economy. Therefore, it helps determine the government's policy stance.

  • Price Stability: Over the past many years, the government spending exceeded the revenues it earned. This led to a large fiscal deficit. A high fiscal deficit stirs up inflation and could hinder economic growth. In such a case, the government announces specific measures in the budget to increase its revenues from non-tax sources such as selling stakes in Public Sector Units (PSUs).

    The government could also increase taxes on a product to reduce its demand, which will lead to a decrease in prices. For e.g. to curb the unending gold appetite of Indians, the government raised the customs duty on gold imports.

  • Stimulate economy: The government also lists measures to cut down expenditure or redirect spending for more productive measures like capital expenditure. All these can affect the country's economic development.

  • Forecasting: The Economic Survey and the Union Budget send out projections through the budget. They predict the state of various macroeconomic indicators like inflation and Gross Domestic Product (GDP) for the country. This gives an idea of the economy's performance in the fiscal year gone by as well as the new fiscal.


  • Budget is mainly watched for its tax-related announcements that affects everyone.

  • It lists the government's plans for economic growth, social development and price stability.

  • Budget also forecasts economic challenges and growth in the year to come.

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Budget 2016: Six terms you need to know

It’s Budget time and there may be many complicated-sounding words being floated around in news. It’s important to know these to understand the Budget well.

Here are six key terms to know ahead of Budget 2016-17:

  • Fiscal deficit: Fiscal deficit is when the government spends more than its income. This is a shortcoming in the government’s account. Whenever the government overspends, it has to borrow from the market in exchange for an interest payment. This interest payment is an additional burden on the government’s finances. A sustained high fiscal deficit causes inflation and forces the RBI to keep interest rates high. However, a fiscal deficit is not always bad. If the extra money is used as an investment for economic development like better roads and infrastructure, it can be good. This is because the money is used productively for economic growth.

  • Subsidy: Often, the government ensures that basic goods and services are available at cheap rates in the market. This includes essentials like fuel. It then pays the companies producing these goods the difference in the market rate and the artificially low rate. This is called as subsidy. Sometimes, the government gives money to customers to buy at market rates, instead of paying companies. All this is called subsidy. In simple terms, subsidy is the opposite of taxes that you pay to the government. Subsidies form a key expense for the government. However, it is considered as non-productive expenditure as it may not directly lead to faster economic growth.

  • Direct & Indirect taxes: Direct tax is that amount that you pay to the government. Income Tax or Capital Gains Tax for individuals and Corporate Tax for companies are direct taxes. This type of tax is incurred from the profits and income that you earn in a year. In contrast, indirect taxes are those that you do not pay directly. For example, companies pay excise duty or import duty on goods and services. This tax is part of the price you pay for the good or service. So, you are paying this amount indirectly. This is why any change in indirect taxes leads to goods and services becoming cheaper or costlier.

  • Tax proposals: Part B is all about tax – both indirect as well as direct. Any change in indirect taxes like customs or excise duty affects companies. This will affect stock markets. It is what you should look at to figure out which goods and services will be cheaper or costlier in the next year. This will be followed by Direct Tax proposals, which covers all changes in income tax, wealth tax as well as corporate taxes.

  • Capital expenditure: Capex is widely called ‘productive expenditure’. It is the money that is utilized by the government to build assets that can help earn in the future. For example, when you build a property to earn rental income, you are investing money in capex. Government capex is usually related to the country’s infrastructure like building of roads, railways, express-highways, canals, and dams. This type of expenditure has the potential to fuel economic growth. Markets always look for the government’s capital expenditure plan.

  • Capital, Revenue Receipts: In the financial world, revenue is also called as ‘receipts’. The government earns revenue from two key sources. Any money the government receives in the form of tax or non-tax sources like dividends and share sales are classified as revenue receipts. Capital receipts refer to all kinds of government borrowings. These are technically classified as debt or liabilities. Markets ideally prefer if the proportion of revenue receipts are higher than capital receipts. This is because the government has to pay interest on the money it borrows. This leads to an increase in spending.

  • Goods and Service Tax: GST is considered one of the biggest tax reforms in the country. It is a new tax that replaces all the indirect taxes in India. Currently, there are numerous indirect taxes levied by both the central and state governments. This makes it very complex for companies that produce and sell goods across states. This is why the government plans to simplify the structure by getting rid of the current multi-tax format. It plans to replace this with the Goods and Service Tax (GST) – a single tax levied by the central and state government. This single tax form would comprise of all the previous taxes.

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The Budget speech: What to look for

The Union Budget is one of the biggest events in the world of Business and Finance. Every one tunes in to hear the Finance Minister’s budget speech. However, you need to know what to look for in the budget speech, which can get into many, potentially confusing details.

Here is what you should look for in the budget speech:

  • Budget speech parts: The budget speech is usually divided into two parts. The first part or Part A talks about the economy and the various policy initiatives that will be undertaken in the new fiscal year. Part B covers all the tax proposals as well as the government’s finances -- revenue, expenditure and borrowing. This is the part that directly influences your investments and businesses. Be alert as the minister runs through specific tax proposals pretty quickly.

  • All about the economy: When you start listening to the speech, first comes the report card of the economy. The finance minister highlights all the economic developments in the year gone. This will be followed by the government’s economic vision for the near future. This will indicate if the budget is pro-growth or not. Last up in the section will be the challenges that the economy faces in the year ahead.

  • Policy changes: The finance minister uses this section to announce important policy initiatives that would be executed by the finance ministry or other ministries. The minister also talks of changes in policy that would be made in the year ahead.

  • Tax proposals: Part B is all about tax – both indirect as well as direct. Any change in indirect taxes like customs or excise duty affects companies. This will affect stock markets. It is what you should look at to figure out which goods and services will be cheaper or costlier in the next year. This will be followed by Direct Tax proposals, which covers all changes in income tax, wealth tax as well as corporate taxes.

  • Government finances: The finance minister then gives out overall revenue, expenditure and the borrowing figures for the year gone by. This is where the government talks about its fiscal deficit – the amount by which it spent more than it earned. The important part is the estimate for the year ahead. The stock market is keen to know the fiscal deficit for the next year as well as how the government plans to spend its money. Markets will cheer any rise in productive spending like capital expenditure on infrastructure, etc.


  • Budget speech contains two halves – Part A and Part B

  • Part A covers the Economic report card, challenges ahead, economic vision and major policy changes

  • Part B talks about all the tax changes and estimates of government revenue, expenditure and borrowing.

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How to read Budget document

The Budget speech is not to be missed. Yet, it may so happen that you failed to notice or missed a few pointers while the finance minister spoke. In such a case, you can go back to the Budget documents that will be available on the Ministry website soon after the Budget speech ends.

That, however, is easier said than done. There are not only many documents published, but also confusing to read. But they are important nonetheless, as there is a lot hidden in the fine print.

Here are pointers that can guide you:

  • Budget Highlights: If you only want to have a glance at the whole budget, look for the document called 'Budget at a Glance'. This is a smaller version of the entire Budget document. You can use this to get your hand on key figures.

  • Government finances: The full budget document is further divided into many sections. If you only want to read about the details of the government's finances like revenue and expenditure, then head to the Annual Financial Statement. You will get all the revenue and expenditure data. It essentially is the government version of a company profit and loss statement.

  • New fiscal year plan: For details about the coming fiscal year, you will have to check the Fiscal-policy Strategy Statement. This is where you will get to know about the sources of revenue, lending and borrowing activities as well as the detailed expenditure and investment plans – essentially, the government's thinking about its finances. If you want to read about fiscal deficit, this is where you should go.

  • Macro-Economic Framework Statement: The Budget also talks about the economy – the performance in the past and the expectations for the future. These details are found in the Macro-Economic Framework Statement. Key points to read are the expected GDP growth rate, economic risks, government's fiscal balance, and the external sector risks.

  • Expenditure, revenue estimates: The government gives exact forecasts of its revenue and expenditure in the upcoming year along with the break up like plan and non-plan expenditure. This helps it figure out its future borrowing and analyse how it can spend productively in the year ahead. These estimates can be found in the Expenditure/Receipts documents. You can find details like planned investments; quantum of subsidies; divestment income; tax revenue, etc. These are analysed to forecast government actions and whether the targets are achievable.

  • Statement of Revenue Foregone: The budget often mentions tax cuts or incentives to individuals or industries to stimulate growth. This, however, means loss of revenue for the government. Even a single 1% change in tax rates can change revenue by crores of rupees. You can get these details – the impact of tax changes on revenue – in the Statement of Revenue Foregone. This can help you figure if tax policies are indeed successful.

  • New rules, acts, policies: The Budget also announces changes in different rules or introduces new ones altogether. For example, think about GAAR or GST. These are merely proposals; the government aims to enact in the year ahead. All of these can be found in the Finance Bill. Be warned though – the language can be quite complicated.


  • You can find two sets of documents – one contains the highlights, the other the details.

  • Details of government finances will be in the Annual Financial Statement and Expenditure/Receipts documents.

  • Get economy-related information in the Macro-Economic Framework Statement.

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Why does Budget matter?

It’s that time of the year when the Government’s Budget is in the limelight. The Union Budget is one of the most watched national events of the year. Even the newspapers are all talking about the Budget.

Here’s why the Budget should matter to you:

  • Sets fiscal policy: The government sets the financial framework in the country by deciding how it will spend and earn money. This affects everything – from economic growth to prices of goods and services in the country to your tax payments. This is called fiscal policy. The Budget gives you the idea of the government’s fiscal policy. This will reflect whether the government is being fiscally smart and growth-oriented or not.

  • Savings: The Budget has a big say in how much taxes you pay. This way, the Budget directly impacts your income, savings and investments. For example: If you sell your stocks within a year, you may have to pay short-term capital gains tax. This, however, may be more tax efficient than investing in Debt. So, you may opt to invest more in Equity. This way, the Budget affects your savings and investment behavior. Moreover, you may find out some options that help you save on taxes altogether. So you end up with more money in your pockets. This affects your actual income.

  • Government spending: How the government spends plays a very big role in the country’s development – economic or otherwise. It can either fuel economic growth or worse, cause inflation. This is why it is important to track government spending. It may not directly affect you, but it has definite consequences in the long-run. For example, an inflationary policy can force the RBI to keep interest rates high. This means, your loans will be costlier.

  • Social welfare: A fixed amount is committed for social welfare services such as education, health, women empowerment and child development. The government announces its decisions on the subsidies available for basic needs such as education, health and welfare. This affects your way of living.

  • Liquor/cigarettes: To discourage smokers and tobacco consumers, the budget generally proposes steep hikes in cigarettes and tobacco products. For example, in 2015 budget, Arun Jaitley announced a 25% excise duty hike for cigarettes of length not exceeding 65 mm and 15% increases for cigarettes of other lengths.” A hike in service tax rates would make alcohol more expensive. These ‘sin goods’ are often a target of excite duty hikes to increase government tax revenue.

  • Impacts economic growth: The spending pattern of the government and planned investments has a direct impact on the economy. A good spending plan can be quite productive for economic growth. On the contrary, loose policy like doling out free money could affect the economy negatively. For example, the government can adjust taxation such that people have the increased capacity to spend, while companies pay less money in production of goods. This could stimulate both supply and demand, leading to economic growth.


  • Budget affects your tax payments, investments and savings.

  • It mentions changes in indirect taxes, which can make everything cheaper, costlier.

  • Budget lists government’s spending and borrowing plans, which affects inflation, interest rates.

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How you could be ready for Union Budget 2016?

The Finance Minister will present the Union Budget for 2016-17 on February 29th. As part of the speech, he will give a detailed analysis of the Indian economy’s performance as well as the government’s finances. This usually moves the stock markets. This is why it is important to be ready for the Budget. Here’s how:

  • News updates: Always keep track of the statements made by the finance minister and other big names ahead of the budget day. It may give you hints on the government’s financial plans. Reading up on budget news is the best way to stay updated. You can also personalize your browser’s newsfeed and set the keyword ’budget’. This might increase your sense of trading opportunities that might be available.

  • Check the current economic scenario: The government will set its policy on the basis of the current economic conditions. So check for fiscal deficit, interest rate, inflation and growth data. This will also decide the market’s reaction to the Budget. Knowing about it can help you be prepared and trade wisely.

  • Expect market volatility: The stock market often witnesses high volatility around the budget. The demand and supply of stocks keep changing every day. But, expectations may be riding high on the Budget day. So, disappointed investors could sell while buoyed traders could buy in droves. As a result, the market movement could be larger than normal on that day. Don’t be surprised by the sharp swings in the market, anticipate and trade accordingly.

  • Understand the basics, impact of tax proposals: Politics and economics are greatly connected. One move from the government could have many repercussions. Read up on the basics – what is fiscal deficit and when is it good? Can budget affect your interest rates and investments? Read up about likely tax proposals too. It could lead to changes in prices of goods and services as well as your own income and spending.

  • Cash will be handy: You may want to ensure that along with stocks you expect to rise and have invested into, there could be opportunities lurking to buy as the budget is announced. It would be a good idea to keep some portion of the portfolio in cash ahead of the budget. In volatile phases of the market, cash comes in handy to seize opportunities to buy at lower prices and sell higher.


  • Read up news and finance minister’s statements ahead of Budget.

  • Check for fiscal deficit, interest rate, inflation and growth data.

  • Understand the basics and impact of various policies, reforms.

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Is a high fiscal deficit always bad for markets and economy?

A high fiscal deficit – i.e., higher government expenditure than income – has always been considered a curse for the economy. It is associated with high government borrowing and impending financial distress. Let’s see how a Fiscal Deficit can sometimes be a blessing in disguise for economies.

  • The Concept of Leverage: Often, companies borrow money to invest in profitable projects. This is called Leverage. Without this borrowing, the companies could not have invested, planned and executed a new project. This leads to a rise in their revenue and eventually an increase in the wealth of their shareholders.

  • Countries need to borrow: Similarly, countries need to borrow too. In fact, countries with a high fiscal deficit are also just using leverage. They may be borrowing money to invest in projects that are beyond their means. These projects are necessary to increase their Gross Domestic Product (GDP), a measure for economic growth, and improve the quality of life.

  • Leverage & Fiscal Deficit: Leverage increases a country’s fiscal deficit in the short run. This is because the country spends the borrowed money on projects, but doesn’t generate returns immediately. However, in the long run, leverage can prove extremely beneficial. This is why some of the richest countries like the USA, Germany, and France have high fiscal deficits. However, for successful leveraging, a country must have good projects available and favorable interest rates.

  • Availability of Good Investment Avenues: Before they give money, lenders assure themselves that they can recover their money. This surety comes only when the borrower – the country – has high credibility and projects that assure good returns. This means the country has to invest in civil infrastructure and construction projects since such projects employ a lot of people and generate assured revenues for several years. Simply doling out the money freely is not likely to generate returns or stimulate growth.

  • Understand with Example: If you were to invest in a highway project, you will provide instant employment to hundreds of people and improve their spending ability. These people may then pay higher taxes and spend more on their lifestyles. This spending, thus, increases the overall demand for goods in the country and, in turn, creates more jobs. The project itself will improve connectivity in the country and facilitate the movement of goods and services. This will allow businesses to cater to customers who they couldn’t serve before. The combined effect of these will be an increase the country’s GDP and the government’s tax revenues. Investors will naturally want to invest in such a project.

  • Subsidies = Free Money: Fiscal deficit can be good if it is used in the short term to stimulate growth. However, government often chooses to give free money in the form of subsidies and other goodies. This leads to growth only in the short term. Eventually, the people spend the money without actually seeing any improvement in their lifestyle. This leads to inflation, not growth. Such a fiscal deficit can be hazardous for the economy.


  • High fiscal deficit can be good if the money is invested in the country.

  • Capital expenditure and productive spending can stimulate growth.

  • Borrowing to give free money as subsidies is bad for economy, markets.

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Budget 2016: How to track government spending

If you are running your household, you will know how important it is to check spending and maintain your finances. The same applies to the government too, which spends for the entire country.

As an investor in the stock market, you want the government to stimulate economic growth. To achieve this, it has to spend right. More specifically, the government has to curb its extra spending and use its money productively without borrowing too much from the market.

You will understand the picture only if you track the government’s spending plan. Here’s how:

  • Full picture: First, start with the big numbers – total spending, revenue, etc. The finance minister will talk about fiscal deficit and how it plans to spend in the new fiscal year. Also look at the spending in the current fiscal year ending March 2016. Markets will react to whether the government manages to meet its fiscal deficit target. If he mentions the term ‘fiscal consolidation’, it means the government is trying to reduce the expenditure. This may be good news, but warrants further reading into the fine print.

  • Productive spending: Sometimes, it may so happen that the government’s total expenditure – and fiscal deficit – may have risen, but this could be because of productive spending. Watch out for the money government commits to build new roads, railway routes, transport infrastructure like bridges and airports. This is called capital expenditure. This leads to formation of new projects. Hence, any indication on planned projects is good. It may also be worthwhile to compare with the previous year’s numbers.

  • Subsidies: Ours is a welfare government. It often interferes in the market and artificially keeps prices of certain goods low. The difference between the actual prices and the artificial low price is paid by the government. Subsidies form a big chunk of the government’s expenditure. Simply giving out money without any productive expenditure can cause inflation without actually leading to growth. This is what happened in the years gone by. As a result, markets may not react positively to news of a rise in subsidies.

  • New policies: The government announces new policies that it plans to undertake in the new fiscal year. Along with the broad details of the policy, it also announces the funds it has set aside for the same. New projects are good as long as they are productive and not a burden on the government’s finances. Some can be purely political. These can be unnecessary expenditure at a time when the government needs to cut down its fiscal deficit.

  • Tax sops, concessions: The government may announce tax cuts, sops and concessions for the industry or general public. Any fall in revenues can also be considered as pseudo-expenditure. While some of the tax sops are necessary for troubled sectors, too many tax cuts can be considered as ‘populist’ – to win votes. It could not only cause a wider fiscal deficit, but also be potentially inflationary.


  • Government has to spend right to fuel economic growth.

  • Read the fine print about government revenue sources, spending plan.

  • Good spending is expenditure for economic development like infrastructure, roads, etc.

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Balancing the Budget: How is that done?

The Finance Minister and his team work on the budget at least 4 to 5 months prior to the presentation in the Parliament. Balancing the budget is one of the biggest challenges faced by the government. This also plays a major role in the stock market sentiment. Governments usually run a fiscal deficit as they spend more than they earn. Stock markets foresee inflation and low growth if fiscal deficits rise. On the other hand, if governments reduce fiscal deficit, markets cheer it.

In order to understand how the government balances the budget, you need to know how it earns, spends and its impact on economic growth:

  • How the government earns: The tax money paid by you and me or the companies is one of the major sources of income for the government. These are direct taxes. There are also a number of indirect taxes imposed on the products that we purchase. Excise duty, customs or import duty and services tax are different types of indirect taxes. The Indian government also receives dividends from public sector corporations it owns.

  • How it spends: The money earned through taxes and dividends is spent on infrastructure and social welfare schemes. When it spends money on such large projects, it is termed as planned expenditure. A higher capital expenditure on such developmental initiatives could result in faster economic growth. The government also spends on other administrative services, salaries, pension schemes, subsidies, defense sector etc. Such type of spending is known as unplanned expenditure.

  • Balancing process: If the government spends more than it earns, it's quite obvious that there's going to be shortage of money. So, it borrows more money from the market. This creates an inflationary situation which results in high interests rates. As fiscal deficit affects economic growth, institutional investors often want the government to borrow less. This could help the government escape the trap of inflation and enable the RBI to set lower interest rates.


  • Balancing the Budget is challenging for every government.

  • The government should rein in spending and keep deficits low.

  • Lesser borrowing helps the RBI keep the interest rates lower.

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How government spends, earns

The tax paid by individuals and companies is the government income. The money is then spent in providing infrastructure and services to people, pay salaries of government employees, buy defence equipment among other things.

Here are some facts you need to know about the earning and spending pattern.

  • Government income: A major chunk of the government's income is earned through taxes. Direct taxes are paid to the government by individuals and companies. Several other taxes also include excise duty, customs or import duty and service taxesthat you pay while purchasing a product or a service. These are known as Indirect taxes.These tax payments account for nearly half of the overall revenue the government generates through taxation.

    Additionally, the government also receives dividends from corporations that they own. This dividend is also paid by large profitable institutions. There have been instances when asset sale enhances the revenue of the government.

  • Government expenditure: The government spends its money on the infrastructure and social welfare schemes. The government usually has a fair idea of how much amount needs to be spent on such development projects like roads, bridges or ports. This is known as planned expenditure. Expenditure incurred on administrative services, interest payments, salaries and pension of government employees, subsidies on food, fertilizer and fuel and defence is known as unplanned expenditure.

    Government spends a certain amount of money on the defense sector as well. This involves the purchase of upgraded military equipments and services of military personnel. There are times when the government pays more to provide fuel diesel, fertilizers at cheaper rates. These are known as Subsidies.


  • Government earns money through direct taxes, indirect taxes and dividends.

  • It spends money in two ways – planned and unplanned expenditure.

  • Planned expenditure includes all the money spent on infrastructure and social welfare.

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