What does the stock market expect from Union Budget 2024?

The February budget was an interim budget due to the looming general election, but the next budget will be a regular budget with major policy decisions and announcements.

With markets hitting all-time highs and stock prices generally at a premium, regular quarterly earnings growth alone won’t be enough to significantly boost stock prices, and regular catalysts will be needed to keep investor sentiment positive.

These could come in the form of specific policy decisions on infrastructure, taxes, capital markets. Sector-specific decisions will also have an impact on those stocks.

The budget will also outline the government’s spending plans, which will be crucial for the fiscal deficit and thus impact inflation, the bond market and the rupee.

What does the stock market want from the budget?

#1 Controlling the Budget Deficit

The key here is to understand the relationship between budget deficits, inflation and interest rates.

The stock market doesn’t like high interest rates because they encourage people to move their money into bonds and fixed income securities, and higher interest rates also make it more expensive for businesses and individuals to borrow.

The main reason for high interest rates is high inflation, but with inflation remaining high, it is unlikely that the Reserve Bank of India will cut interest rates anytime soon.

Yet markets want inflation to be kept in check, and one of the best ways to achieve this is for governments to rein in spending.The issue here is not spending per se, but the difference between spending and revenue – the budget deficit.

The fiscal deficit target for FY25 is 5.1% of GDP. The market will react whether the target is lowered or raised. An increase will be received negatively by the market, while a reduction will be welcomed.

#2 Long-term policy decisions

Indian governments have long been accused of lacking long-term vision, and the budget has been used as a tool to push through policies that benefit current voters without looking to the future.

There is nothing wrong with such an approach, By itselfLong-term planning has not been a strength of previous budgets. Speaking in Parliament, President of India Drupadi Murmu said the next budget would be “future-oriented”.

She said, “My government will present its first budget in the next session. This budget will be an effective document that sets out the government’s far-reaching policies and vision for the future.”

“This budget will also take a number of historic steps along with major economic and social decisions. The pace of reforms will be further accelerated in line with the aspirations of the Indian people for rapid development.”

Markets are eagerly awaiting any big announcements regarding the future of the Indian economy, with many expecting the government to take at least one historic policy decision.

#3 Increased capital investment

While a slowdown in public capital expenditure had been a concern following the Interim Budget, Dalal Street expects a significant increase in capital expenditure in the overall budget.

This is important because while regular government revenue spending is essential to running a country, it does not fuel the economy — only capital spending can do that, especially when it comes to large infrastructure projects.

Therefore, the stock prices of all infrastructure companies will depend on this figure.

#4 Sector-specific decisions

These are the pillars of every budget. Various industry associations meet with finance ministry officials and submit proposals to the government ahead of the budget. Only a few of them actually make it into the budget as most can be handled separately.

However, certain policies are seen as indications of government priorities and could act as positive catalysts for stocks in those sectors.

This time, positive expectations have been pinned on infrastructure, real estate, small and medium enterprises, defence, metro and Vande Bharat railways, textiles, travel and tourism and research and development sectors.

The coalition government is also expected to significantly increase spending on agriculture, health, education and social welfare systems.

What this means for investors

Investors should not base specific investment decisions on events such as the budget, as history has shown that markets quickly forget budgets.

However, some decisions are important as they may have a material impact on certain stocks or sectors. Investors should keep a close eye on such decisions and evaluate their impact on the stocks in their portfolios.

Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.