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Budget: A hype?

Feb 25, 2003

It is that time of the year that stock markets generally tend to head north. Apart from other reasons like general rise in foreign money flow into the country, pre-budget expectations also aid sentiment to an extent. We look at the trend on the stock markets over the last five years analysing the one month period before the announcement of the budget. As is evident from the table below, five out of the last six occasions (including the current year), stock markets have rallied before the budget. Budget is generally a big event in India with industry associations and the likes submitting their pre-budget wish list to the finance minister. These would encompass broader issues like the need to facilitate investment climate in the country to industry specific issues like reduction in excise/customs duty. A specific emphasis on the government's need to tighten its own belt also raises significant interest and debate.

Pre-budget…
(points) Jan 31st Feb 28th/29th Change
1998 3,224 3,622 12.3%
1999 3,316 3,400 2.5%
2000 5,205 5,740 10.3%
2001 4,327 4,247 -1.8%
2002 3,311 3,562 7.6%
2003* 3,250 3,322 2.2%
(*till Feb 25, 2003)
Post-budget…
(points) Feb 28th/29th March 31st Change
1998 3,622 3,893 7.5%
1999 3,400 3,740 10.0%
2000 5,740 5,001 -12.9%
2001 4,247 3,604 -15.1%
2002 3,562 3,469 -2.6%

This would be preceded/followed by the Finance Minister meeting the industry heavyweights for consultation and hearing out key challenges faced by them during the normal course of the business. As in every year, the industry vouches lack of demand in the economy as the key challenge. And more often than not, such wish-lists from the industry actually are the front runners in building expectations on the stock market. This, in turn, leads to a rally ahead of the budget as noticed from the table above. The only exception was the year 2001, when stock markets fell by around 2%. The reason could be the overhang of the slowdown in the technology sector among investors.

However, the story after the budget has been a mixed one. While stock markets managed to gain significantly in 1998 and 1999, the following three years were rather disappointing ones for investors. The decline in stock markets in 2000, 2001 and 2002 was also on account of various external factors. The technology boom peaked during the Jan-March 2000, after which there was no respite for investors. In 2001, stock markets were left high and dry in light of unearthing of the stock market scam. And in 2002, violence broke out in the state of Gujarat, which had a significant impact on the economy. That said, except for the 2001, budgets in 2000 and 2002 were rather a disappointment for the stock markets as well.

Will this year be any different? The Kelkar committee recommendations has sparked nervousness among retail investors this time following proposals like reduction in housing sops. On the positive side, expectations are also ripe for the Finance Minister scrapping the dividend and capital tax gains this time. One could expect some measures for reducing customs and excise duties as well.

But what is required from the Finance Minister is something different, from a long-term perspective? Beyond scrapping of dividend and capital gains tax, the vital measure could be to conceptualize a medium to long-term objective for the economy. Just to put things in perspective, the Reserve Bank of India's key long-term objective is to strengthen the financial system, which it has been doing successfully over the years through the monetary policy. Though one understands the political implications of sensitive decisions like labour and expenditure reforms, what is required now is the 'intent'.

Such a long-term objective or atleast 'intent' has been missing for all this while, which has proven to be costly for India. Though the current Finance Minister has just one more budget to go (apart from the current one), he could set his imprint on India's future.

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