High expectation has added risk on post-budget rally…

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Budget has been losing its significance to the market in the last two decades as key policy changes evolved with more flexible and constructive measures on a continuity basis. But at the same time, we should also mention that budget has found relevance when the world and domestic economy were under concern, impacting the trend and structure of the economy in the short to medium-term. Budget is a model document mentioning the long-term vision, perception and measure of the current government which will define the country’s economic stability, consolidated financial statement, fiscal deficit, inflation, political and industrial norms. Overall, while the union budget has lost its importance in some sections it has gained significance in some others as the world and domestic economies have become more volatile.

This time the importance of union budget is substantial due to very high expectation. The build-up to the high expectation is because of cyclical and structural damages to the economy in the last two years. This was also acknowledged by the government, as it understood the setbacks and came-up with counteractive and interim measures to support the industries. It also understood that the government will not be able to achieve the target of USD 5trn in 2024 unless provided with more stimulus, because as on FY19 India is USD 2.7 trillion economy. The government has been proactive in preparing the FY20-21 budget, it has sought inputs from key industry associations, economists, and authorities, providing hope that this budget will present important measures to improve the economy and market.

Expectations have build-up that goodies will be provided to public and enterprises. Starting with tax cut to salaried class and relaxation surcharges to HNI and schemes for farmers and rural economy. Incentives are also expected for the equity market with relaxation in long-term capital gain tax period, rebate in STT and drop in dividend distribution tax. Industry and sector specific measures are also expected for housing, auto, infrastructure and others. It is also expected that fiscal deficit will be expanded with more capex expenditure in the coming years to bring growth in the economy. This will be difficult to attain as the market will be watchful looking for realistic forecast. In total, these are very high expectation which the government may not be able to handle given the weak fiscal and uncertainties on future revenue from divestment, spectrum and GST, the key segments of income in the future.

The market touched a new high in the month of January 2020 with a one-month return of 1.5% for large-caps, 9% for mid-caps and 11% for small-cap, indices. From the 52wk high the performance of the market has been subdued, as if approaching a careful tactic before the budget day since the event-risk is high this time because of a lot of expectation and superb performance recently. We should not be surprised if the market consolidates after the budget. The budget will be a blockbuster for the market and economy even if a decent part of the wish-list is fulfilled.

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