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Budget and the stock markets

It is not uncommon for stock prices to swing between extremes as the budget proposals are unfolded by the Finance Minister in Parliament. They behaved the same way this time too. The stock prices went down sharply, with the Sensex losing 540 points on the budget day (February 28). More often than not, instant reactions to the Finance Minister's pronouncements set the trend for price movements, at least over the short-term. On March 1, stock prices rallied, with the Sensex going up by 221 points, only to drop sharply by 273 points the next day — the last day of the week. Obviously, it takes some time for the full implications of the fiscal policy to sink in. Yet it is the stock market's reactions captured in "real time" that have become one of the defining factors in budget formulation. This is unfortunate for at least two reasons. First, the government could do with a more reasoned feedback than what the early price movements usually suggest. Secondly, even reasonably well-informed market participants are known to go wrong with their initial judgments. Besides, sector-specific announcements in the budget can make a disproportionately large impact. Not just cement stocks but the broader indices also tumbled in the wake of the announcement of the proposal to introduce a dual excise duty regime for cement. Again, the decision to extend the minimum alternate tax to the information technology companies was greeted with all-round dismay, although some of the leaders in that industry had themselves suggested such a step two years ago.

In their present state, Indian stock markets cannot be considered to be a barometer of economic policies. Moreover, in an increasingly globalised marketplace, the influences from other markets count far more. In fact the post-budget trend towards sharply lower stock prices was set by the developments in China, the United States and other global markets the previous day. Worries over the budget might have accentuated the trend but, by themselves, they might not have caused all that damage. On the other side, the case for further demystifying the budget exercise has never looked stronger. In fact with the periodic release of official economic data, anticipating major shifts in economic policies has become easier. At least a month before the budget, it was known, for instance, that tax collection targets would be comfortably surpassed and that the fiscal deficit targets would be met. A budget that emphasised continuity was what was indicated. The market's disappointment over the absence of some more feel-good announcements, though understandable, should not cause upheavals in stock valuations.

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