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Markets: Pinning down the Budget

Jan 12, 2007

Come late January-early February and most Indians be it corporates, individuals, businessmen salaried and housewives tune in to the FM! No, please do not misconstrue this to be some radio station but we are here referring to our Finance Minister. "Reality leaves a lot to the imagination" is a quote best manifested at these times. Speculating about which new gamut of taxes are likely to be imposed and what incentives are likely to be offered becomes the nation's best pass time. Investors with an appetite for equities often consider this as the most opportune time to read between the FM's pre-budget comments to try and guess the sectors / stocks that will be the prime beneficiaries from the budget. Budget is the annual exercise of the Finance Ministry for taking stock of and streamlining its revenue and expenditures so as to keep the economy on track and proceed towards meeting the Five-Year plans. This certainly is an event to be tracked by every investor so as to get cues about the functioning of the government and the economy and make one's own judgment from the same. However, an irrational apprehension with respect to the same, especially when it comes to taking calls on one's investment portfolio, is certainly unwarranted. Our analysis of the market movement pre and post budget over the past 5 years shows that while the budget does cause a momentary fluctuation in the trend, the fundamentals soon catch up and the markets get back to the 'efficient pricing' norm.

The budget primarily impacts sectors and stocks due to a combination of some the following reasons:

  • Fiscal incentives: While imposition of higher excise or customs duty or service tax make it pertinent for manufacturers / service providers to re-price their goods / services, at times competitive pricing compel them to compromise on their margins, thus making the sector unattractive. Conversely, roll back of such duties leave a higher spread at the disposal of the manufacturers / service providers, thus proving to be an incentive for investors in the sector.

  • Budgetary provisions: At times the Union Budget makes special provisions for certain sectors to accelerate growth in that sector. Sectors like power have found mention in several budgets with provisions outlining ultra-mega power projects that can aid infrastructure development.

  • Special incentives: Special incentives like the Technology Upgradation Fund (TUF) provided to revive the textile sector by way of offering 5% subsidy on loans sourced from banks for upgrading and setting up new capacities - also provide a fundamental basis for investment.

  • Cascading effect: Again there are factors that are not the direct fallouts of the budget but get influenced indirectly due to a cascading effect. For example, the government's focus on expanding the irrigated cultivable land so as to reduce dependence on monsoon increases the scope for companies that manufacture tools for irrigation. Similarly, fiscal incentives on mortgage investment have a benign impact on the construction and housing loan industry.

  • Investor sentiment: Finally, the general sentiment about the budget that often gets influenced by the expert comments aired on all media channels determines whether the budget is a 'populist' one and to some extent reiterates investor confidence on the economy and stock markets.

Should this impede your investment decisions?
While we are strong advocates of 'fundamental basis' to equity investing and the budget often provides such fundamental fillip to a couple of sectors, we do not subscribe to the idea of investors deferring or basing their investment decisions in anticipation of or in response to such transitory events. Research on sectors and stocks with a long-term perspective has seldom proven to be materially impacted by such events.


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