What the Stock Market Expects from the Budget

The Indian stock market has suffered a correction over the last week or so.

The concerns on the minds of traders and investors were about the US Fed's policy decision and the tensions in Ukraine and the Middle East.

However, over the next week or so, almost all the coverage in the Indian financial media will be about the budget.

And rightly so.

To the markets, the Union Budget isn't just an annual accounting exercise. It's the most important event of the year.

If the market views the budget positively, stocks will rise, at least in the short term. All thoughts of a correction will be forgotten.

But if the markets don't like the Finance Minister's speech, for whatever reason, there will be a bloodbath of Dalal Street.

Let's look at what the market wants in this year's 'paperless budget' on Tuesday, 1 February.

Government Spending

The market expects stability this year along with a continuation of existing programs.

Last year, the government increased spending in response to the pandemic. It also significantly ramped up infrastructure spending.

This time around, the market does not expect a huge increase in spending. In fact such an announcement could trigger a negative response due to concerns over the fiscal deficit.

The market should respond positively to an announcement of a clear path to manage spending in the long term.

Infrastructure

The market expects the government to keep its focus on building physical infrastructure.

Various infra industry groups have already expressed their views to the government. Roads, railways, ports, airports, pipelines, electricity, and telecom will be the sectors in focus here.

Major announcements could impact the following stocks...

New road building targets - IRB Infra

More railway lines with increased spending on safety - RVNL, IRCTC

Gas pipeline projects - GAIL, Mahanagar Gas, Gujarat Gas

Big push for green energy, especially green hydrogen projects - Tata Power, Adani Green

5G rollout - Reliance Industries, Bharti Airtel, Vodafone Idea

On Equitymaster's Stock Screener use the customised screens to more informed decisions on:

India's best infra stocks

Top 5G Stocks

Real Estate

The industry wants capital gain exemptions on buying second and third homes as well as more tax benefits on housing loans.

Realty players also want tax relaxations, especially GST, on commercial real estate.

Any announcements in this regard will be positive for real estate stocks.

Check out the top real estate stocks in India on Equitymaster's stock screener.

EVs

The auto industry expects the government to reduce GST on battery packs from 18% to 5% because EVs themselves fall in the 5% bracket.

Auto firms also want a huge push for charging stations in the budget. An announcement on this front will be a big positive for auto stocks.

Check out the top EV stocks in India on Equitymaster's stock screener.

Pharma

Pharma companies want the government to provide more incentives to companies to manufacture drugs in India. This is especially keeping in mind the China+1 strategy of MNCs.

The industry is also asking incentives to boost medical R&D in India.

Check out the top pharma and healthcare stocks in India on Equitymaster's stock screener.

Defense

Don't be surprised if defense spending goes up again this year.

The Indian armed forces are in the middle of a major re-organisation and modernisation. Considering the two-front threat the nation faces, the budget could allocate more funds to defense.

Check out the top defense stocks in India on Equitymaster's stock screener.

Unlisted

The market also expects the government to provide incentives or make major announcements that will affect companies that are unlisted. These include startups, the informal economy, the MSME sector, and the nascent crypto industry in India.

Taxation

The market is not expecting any major changes to either direct or indirect tax rates. However, some tinkering is possible.

There is a rumour the government might increase the limit under section 80C for saving taxes. But don't be surprised if any announcement on this front is a minor one.

The market doesn't expect any changes to the capital gains tax.

Privatisation

The market expects progress on this front.

The government manged to get Air India of its back this financial year. The market is keenly watching for an announcement of the next potential candidate. This will be big if the government names specific PSUs as targets.

Conclusion

All in all, the market expects the government to keep its focus on infrastructure in this budget without going overboard on spending.

If the government can keeps its expenses in check, the market will breathe a sigh of relief on inflation.

Any major reform announcement will be welcomed. Also the market wants something concrete on privatisation.

And finally on taxes, the market wants some relief for consumers, as long as it doesn't affect the government's deficit too much.

It will be a very fine balancing act for the Finance Minister. There are many sections of the economy demanding some kind of relief or incentive.

On the other hand, after last year's spending binge, there isn't too much room for stimulus.

We will find out the market's reaction on Tuesday.

Traders and investors have their fingers crossed!