Being the world’s biggest democracy, India holds several parameters to gauge its economic state. Out of these documents the Union Budget holds paramount importance.  The immense significance of this document can be perceived from the fact that it comes under the category of a mandatory document under Indian Constitution’s Article 112.

The union budget, also known as the Annual Financial Statement, maintains the government’s financial records for the fiscal year i.e. 1^st April to 31^st March, and as a result, a Union Budget is allocated for each fiscal year.

The budget, which is an accounting document, serves as a vehicle for putting government policies and reforms to achieve the following functions:

• Effective resource allocation.
• Minimize unemployment and poverty levels.
• Narrow down wealth and income gaps.
• Keep prices under control.
• Changing the tax code to fulfill the above objectives.

The main sections of the budget statement include capital budget and revenue budget. With this background let’s look into the details of the capital and revenue budget.

Capital budget:

The capital budget records capital expenditures and receipts for the government. Loans from RBI and general public comes under the category of capital receipts, whereas costs associated with building and maintaining medical facilities, educational facilities, and equipment are considered capital payments.

Revenue budget:

A revenue budget, as its name suggests, considers all revenue-related expenses and receipts. The government experiences a revenue deficit (shortfall) if the revenue expense exceeds the revenue receipts.

With this in the backdrop, let’s glance through the ways by which budget can influence the stock market.

1. Fiscal policy: The government’s spending and taxation policies, as well as its budget, can have a big influence on the equity market. For instance, the demand for construction and engineering companies’ stock may rise if the government raises expenditures on infrastructure projects. On the other side, if taxes are hiked by the government, company earnings and profits may be under stress and stock prices may decline.
2. Interest rates: The regulation of interest rates by the government, as part of its monetary policy, may influence the equity market. Raising interest rates might increase the cost of borrowing, which would hinder economic expansion and hurt stock prices.
3. Inflation: Stock prices may be impacted by inflation, which is also influenced by the government’s budget. Rising inflation can reduce consumers’ disposable income and have a negative effect on business profitability, which can also lower stock prices.
4. Government debt: The stock market may be impacted by the government’s budget deficit and debt. Stock prices may suffer if investors become concerned about the government’s capacity to pay off its debt as a result of a significant budget deficit and rising debt.

In essence, it is crucial to take into account that there are a variety of parameters (factors) that can affect the stock market, and it is crucial to take into account the larger political and economic backdrop when examining how the budget will affect stock prices.