Budget's day out at the market

As D. R, Dogra, Managing Director and CEO, CARE Ratings puts it, “The Union Budget is one of the most anticipated events which lays down the broad policy framework as well as the tax rules and expenditure outlays for the year. It has been observed in the past that the market has taken these announcements seriously and reacted according to the perceived impact on the corporate sector.” A look back at the budget day movements since 1996 reveals there were years when market tanked as much as four per cent in hours owing to budgets that did not go well with the investor psyche.

 

Sensex, the Indian benchmark stock index, had received a steep cut of over five per cent in 2000 when the budget did not live up to the hype that has been created in the run up to the actual announcements. The increase on dividend out go for companies and subjecting export earnings to a 20 per cent tax per annum over the next few years were seen as unfavourable by the market. The budget’s failure to address existing concerns related to fiscal deficit, government spending and public sector disinvestment also contributed to market woes. In 2002 the budget again struck market with a 3.80 per fall dragging Sensex from a close of 3,705 on the previous day to 3,562 at the end of the budget day.

 

In 2007, the Sensex was delivered a fait accompli despite the fact that the market was going through a superb bull run. The so-called unfriendly Union Budget in 2007, saw an increase in dividend distribution tax from 12.5 per cent to 15 per cent apart from increase in excise duty in cement and extension of minimum alternate tax (MAT) for the IT sector. Sensex fell four per cent from 13,479 to 12,938 during the course of the day. On the other hand there have been occasions when budget had helped the market to move up in jiffy. Both in 2001 or 2005, popular measures by the finance minister like relaxations in taxes had helped the Sensex climb 4.36 per cent and 2.19 per cent respectively.

 

As seen over the years, the impact of budget on the Sensex, has grown manifold. It became even more evident after 2000 when then finance minister Yashwant Sinha decided to change the existing practice of presenting the budget after 5PM (a practice that started in the British era to match the office timings in UK). With the budget timings coinciding with the market and with the whole world gazing at it with unabashed interest and the ensuing media hype, markets have started reacting to budgets on a real time basis.

 

As a result while seven times in the past 12 budgets (since 2000) markets have either fallen or moved up more than one per cent on the budget day, they have witnessed movements of a similar magnitude eight times within the next 15 days of the budget.

 

The impact of budgets on a long-term basis too cannot be denied. Sudip Bandyopadhyay , CEO and MD, Destimoney Securities, believes that apart from the measures that directly impact financial markets, the overall fiscal measures taken effect budget deficit, which in turn has a significant impact on the markets over a period of time. “During 1980s, populist measures taken by various governments led to significant worsening of the fiscal position and the balance of payments. This led to a crisis like situation in the early 1990s. We may very well say that the fiscal imprudence in the 1980s led to the financial crisis in 1991 which in turn paved the way for economic reforms in India,” says Bandopadhya. However, as far as the market impact of budgets are concerned, more than the announcements on budget day, it’s the fulfillment or non-fulfillment of expectations created during the run up to the budget period that matters. In a way, one can consider the budget day impact as an extension or correction made to the Sensex for the movement that it registers in the pre-budget days, especially the last two weeks before the budget is tabled.

 

Six out of 12 budgets since 2001 have seen such corrections happening, the most notable being the 2001 budget when markets lost over six per cent between February 16 and February 28, the budget day, to gain as much as 4.36 per cent on the D-day itself. Likewise in 2002, after gaining close to three per cent in nine consecutive trading sessions, the Sensex lost close to four per cent on the budget day. However, it yet remains to be seen whether the budget day will see another mayhem or extension of the bull run.